U5: Improving Cashflow and Profits

Question 1

What are Examples of Cash Inflows?

Answer 1

• Cash sales
• Receipts from trade debtors
• Sale of fixed assets
• Interest on bank balances
• Grants
• Loans from bank
• Share capital invested

Question 2

What are Examples of Cash Outflows?

Answer 2

• Payments to suppliers
• Wages and salaries
• Payments for fixed assets
• Tax on profits
• Interest on loans & overdrafts
• Dividends paid to shareholders
• Repayment of loans

Question 3

What is Finance need for?

Answer 3

• Business Set-Up
• Day-to-day trading (working capital)
• Growth

Question 4

Example of Cash Flow Cycle

Answer 4

Inflow = cash paid by customers
Outflow = cash paid to suppliers and employees
Stocks ordered from supplier-> Production turns stocks into products -> Stocks held until a customer is found -> Products sold to customers -> Customers pay for their purchases ->

Question 5

The cash flow operating cycle

Answer 5

• It is equal to:
- The time that goods are in stock
- plus the time that debtors take to pay
- minus the period of credit received from suppliers
• The working capital cycle can be shortened by
- reducing the level of stock - this lowers the number of days the stock is held
- speeding up the rate of debtor collection
- the faster business collects from its debtors the better
• The shorter the cycle, the lower the value of working capital to be financed by other sources

Question 6

What is a cash flow problem?

Answer 6

When a business does not have enough cash to be able to pay its liabilities

Question 7

What are the main causes of cash flow problems?

Answer 7

• Low profits or (worse) losses
• Over-investment in capacity
• Too much stock
• Allowing customers too much credit
• Overtrading
• Unexpected changes
• Seasonal demand

Question 8

What is the importance of monitoring cash flow?

Answer 8

Monitoring cash flow is an essential. If a manager can spot a looming cash flow problem at an early stage by comparing forecast and actual cash flow on a monthly basis then it is possible to take prompt and decisive action.
These actions may rectify the problem before it becomes too severe.

Question 9

What is Profitability?

Answer 9

Profitability is a measure of financial performance that compares a business’s profits to some other factors such as revenue.

Question 10

What is Profit?

Answer 10

Profit measures the extent to which revenues from selling a product over some time period exceed the costs incurred in producing it.