Unit 23 : Cash Flow Forecasting and Working Capital

Question 1

Define Cash

Answer 1

cash is a liquid asset meaning it can be immediately available to be spent on goods / services

Question 2

Define Cash Flow

Answer 2

the cash inflows & outflows over some time

Question 3

3 Possibilities if a Business runs out of Cash

Answer 3

1. inability to pay workers, suppliers, landlord, government
2. production stops due to unpaid workers and suppliers
3. business may be forced into “liquidation” ( selling everything it owns to pay debts )

Question 4

Define Cash Inflow

Answer 4

sums of money received by a business during a period of time

Question 5

Sources of Cash Inflow

Answer 5

sale of goods, sale of assets, payments to debtors, borrowing money, investors

Question 6

Define Cash Outflows

Answer 6

sums of money paid out by a business during a period of time

Question 7

Sources of Cash Outflows

Answer 7

purchase of goods, purchase of non-current assets, payments of salaries, repaying loans, trade payables

Question 8

Define Cash Flow Cycle

Answer 8

stages between paying out cash for labour, materials, and so on, and receiving cash from the sale of goods.

Question 9

4 Stages of the Cash Flow Cycle

Answer 9

1. cash needed to pay for materials, wages, rent, etc.
2. goods produced
3. goods sold
4. cash payment received for goods sold

Question 10

Define Cash Flow Forecast

Answer 10

an estimate of a business’s future cash inflows and outflows on a month-by-month basis. shows the expected cash balance at the end.

Question 11

Define Closing Cash Balance

Answer 11

the amount the business holds at the end of each month

Question 12

Define Opening Cash Balance

Answer 12

the amount the business holds at the start of each month

Question 13

3 Things a Cash Flow Forecast can Tell

Answer 13

1. how much cash is available for paying bills, repaying loans or buying fixed assets
2. how much cash the bank might need to lend the business to avoid insolvency
3. if the business is holding too much cash which can be put to a profitable use

Question 14

Define Net Cashflow

Answer 14

the difference between the cash inflow and outflow ( cash inflow - cash outflow )

Question 15

4 Uses of a Cash Flow Forecast

Answer 15

1. starting up a business
2. keeping the bank manager informed
3. managing an existing business
4. managing cash flow

Question 16

4 Ways to Overcome Cash Flow Problems ( Short Term )

Answer 16

1. increasing bank loans : injects cash into business, but interest and loan must be paid back
2. delaying payment to supplier : decreases cash outflows in short run, but supplier may reduce discounts or supply for late payment
3. reducing credit period : helps increase short-term cash inflow, but customers may switch to competitors
4. delaying purchase of fixed assets : reduces cash outflows, but in long term could cause lack of efficiency due to not up-to-date technology

Question 17

3 Ways to Overcome Cashflow Problems and their Drawbacks ( Long Term )

Answer 17

1. attract new investors : could affect ownership of business
2. cutting costs, increasing efficiency : employees and product quality may be affected
3. developing new products : could take a long time, needs cash in short term for development

Question 18

Define Working Capital

Answer 18

capital available to a business in the short term to pay for day - to - day expenses

Question 19

Formula for Working Capital

Answer 19

current assets - current liabilities

Question 20

3 Forms that Working Capital can come in

Answer 20

1. cash
2. value of debtors
3. value of inventory