Unit 3.7 Cash flow

Question 1

cash flow

Answer 1

money that flows in and out of a business for a given period

Question 2

profit

Answer 2

the positive difference between sales revenues and costs

Question 3

Profit vs Cash flow

Answer 3

1) Business can be profitable but have little cash
- poor collection of funds
- paying suppliers earlier
- purchasing non-current assets at the same time
- servicing loans in cash

2) Business can have a positive cash flow but be unprofitable
- source cash from bank loans
- gain cash from sales of assets
- obtain cash from shareholders’ funds

Question 4

Cashflow forecast

Answer 4

the future prediction of a firm’s cash inflow and outflows over a given period

Question 5

Constructing cashflow forecast

Answer 5

• Opening cash balance
• Total cash inflows
• Total cash outflows
• Net cash flows
• Closing cash flows (net cashflows and opening balance)

Question 6

Advantages of cashflow forecasting

Answer 6

• useful planning document
• good support for applying to financial institutions
• help managers identify in advance when will business need money
• help monitor cash flow by comparing predictions to results

Question 7

Limitations of cash flow forecasting

Answer 7

Predictions and inaccuracies are bound to happen
- unexpected changes in the economy
- poor market research
- demotivated employees
- unforeseen machine failure

Question 8

Strategies to deal with cash flow problems

Answer 8

1. Reducing cash outflows
   - delay credit payments
   - delay purchasing fixed assets
   - decrease expenses that don’t affect production
   - source cheaper suppliers without hindering quality
2. Improving cash inflows
   - insist on only cash payments
   - offer discounts
   - diversify product offering
3. Additional financial sources: bank loans, sale of assets…

Question 9

Investment

Answer 9

the act of spending money to purchase an asset with the expectations of future earnings