Unit 3: Aim E Break-even and cash flow forecasts Flashcards
What is a Cashflow Forecast?
It’s a document that shows the predicted flow of cash in and out of the business over a given period of time normally 12 months
What does a cashflow forecast show you?
- A healthy cash flow means that a business
will have enough cash at any one point in time to be able to meet demand for short-term cash outflows - A business can identify where there might be
shortages and either try to prevent this from happening or put plans in place to deal
with it
What are the 6 inflow?
- Cash Sales
- Credit Sales
- Loans
- Capital Introduced
- Sales of Asserts
- Bank Interest Received
What is Cash Sales?
the customer pays for the product or service immediately when they make the purchase
What is Credit Sales?
the customer buys something but doesn’t pay for it right away. Instead, they agree to pay later, within a certain time period, like 30 days
What are Loans?
amounts of money that businesses borrow from a bank or other financial institution to buy important things
What is Capital Introduced?
refers to money that the business owners or shareholders put into the business to either start it up or to help it grow.
What are sales of Asserts?
Sometimes businesses sell things they no longer need, such as old equipment or furniture, in order to get cash quickly. These items are called “assets,” and selling them can give the business a short-term boost in cash flow.
What is Bank Interest Received?
The interest that the bank pays to a business on any money the business has saved in its account. When a business has money sitting in the bank, the bank gives them a little extra money (interest) as a way to encourage saving.
What are the 10 outflow payments?
1.Cash Purchases
2.Credit Purchases
3.Purchase of assets
4. Value Added To Tax
5. Bank interest paid
6. rent
7. rates
8. salaries
9. wages
10. utilities
What is Cash Purchases?
When a business buys something, it pays for it right at the time of the purchase,
What is Credit Purchases?
When a business buys something but doesn’t pay for it right away. Instead, the business agrees to pay for the items later
What are purchases of asserts?
This refers to when a business buys things that it plans to use for a long time, usually more than a year. These are called non-current assets because the business doesn’t plan to sell them soon but rather keep them to help run the business
What is Value Added to Tax?
VAT is a tax that businesses must pay when they buy or sell products. If a business is VAT registered, it must pay VAT to the government (HM Revenue & Customs - HMRC) on the items it buys and sells
How do you evaluate cashflow- forecast?
- Opening balance – amount
of cash available in a business
at the start of a set time
period, for example a month. - Closing balance – amount of
cash available in a business at
the end of a set time period,
for example a month.
What are the 4 key uses of cashflow:
- Planning
- Monitoring
- Control
- Target Setting
How is Planning useful?
A cash flow forecast helps a business plan ahead by showing when money is expected to come in and go out. This allows the business to make sure it has enough cash for things like paying bills, buying supplies, or paying employees.
Without a forecast, the business might not know when it will have enough money or when it might run out.
How is Monitoring Useful?
Monitoring how the business is doing over time. It helps keep track of how much cash is actually coming in and going out, compared to what was expected. This helps you stay aware of any differences and understand if your predictions are accurate.
How is Control Useful?
The business can control its spending. If the forecast shows that there will be a cash shortfall in the future, the business can take steps to reduce costs or increase income. It helps prevent spending more than what’s available.
How is Target Setting Useful?
Cash flow forecast helps set targets for the business. It shows what cash the business needs to meet its goals, like expanding, paying off debts, or saving for something big. By setting cash flow targets, the business can work toward specific financial milestones.
What are the advantages of Cashflow-Forecast?
- Helps with Planning: helps businesses plan for future cash needs, ensuring there’s enough money available to cover expenses
- Improves Financial Control: By tracking inflows and outflows, businesses can stay on top of their cash positions. They’re heading towards a shortfall, which helps them take action before running out of money.
- Identifies Potential Problems Early: A well-maintained cash flow forecast helps business owners spot potential cash shortages in advance. This early warning system allows them to take corrective action
- Facilitates Decision Making: Forecasting helps businesses make informed decisions about where to spend, how much to save, and when to make large purchases.
What are the Disadvantages of Cashflow- Forecast?
- Inaccuracy: it can sometimes be inaccurate. Predicting future cash inflows and outflows can be difficult,
- Time-Consuming: Preparing and maintaining an accurate cash flow forecast requires regular updates and close attention to detail
- Assumes Predictable Patterns: businesses may experience unexpected changes that disrupt the forecast, such as sudden drops in sales or unplanned expenses.
- May Lead to Overreliance: Business become too reliant on their cash flow forecast and overlook other factors so it doesn’t account for every possible situation (such as economic downturns, pandemics, or unexpected market shifts).
What are the problems with cashflow Forecast?
- Negative Closing Balance: If a business’s outflows (payments) are greater than the opening balance plus inflows (incoming cash), this leads to a negative closing balance, meaning the business doesn’t have enough cash to meet its obligations
- Fluctuating Cash Flow Cycle: Many businesses, especially seasonal ones, experience fluctuations in cash flow throughout the year. This means that the business might have periods of high cash inflow
What are the solutions with cashflow forecast?
- Overdraft Arrangements: If a business is facing a temporary cash shortfall, it may be able to arrange an overdraft with the bank
- Negotiating Terms with Creditors: A business can negotiate with its creditors (the people or companies it owes money to) to extend payment terms.
- Reviewing Capital Expenditure: If a business faces cash flow problems, it can review its planned spending on large items like machinery or vehicles
Calculation for net cashflow
cash inflow- cash outflow
Calculation for closing Balance
opening Balance + net cashflow
if + than add
if - than minus
Remember the key terms:
Liquidity
Insolvent
Liquidity – measures a firm’s
ability to meet short-term
cash payments.
Insolvent – when a firm is
unable to meet short-term
cash payments.
Change Deck
Okay
What is a Break even analysis?
Break-even is the point at which a business is not making a profit or a loss, i.e. it is just
breaking even. This means that the money being received from sales is the same as the
money being spent on costs
What are the 4 Costs:
- variable
- semi- variable
- fixed cost
- total cost
Explain the definition of:
- variable
- semi- variable
- fixed cost
- total cost
