Unit 5-Cashflow Flashcards
Overtrading
When a business expands too fast, putting stress on working capital. E.g producing too much, becoming insolvent before they even get paid by customers
Return on investment formula
Return from investment/Cost of investment x 100. The higher the better
Capital structure and the measure
How a business raises capital to purchase assets.
Debt to equity ratio
Influences on financial objectives
Internal:
Overall objectives-depends on company
Status of business-new businesses want high revenue for market share, established businesses may not
Other functions of business-e.g HR-high turnover may limit sales
Cash flow cycle
The delay between money going out and money coming in
Why is cash flow cycle a problem for start ups
They have to pay all start up costs before sales e.g R&D, production costs etc
The ideal cash flow situation
Short period between money going out and in, and businesses given a longer credit period, and a shorter debt period for customers.
Why is cash flow important
Meet day to day liabilities, avoid insolvency
Use of forecasts (3)
Secure finance from potential investors and provide reassurance for existing investors/lenders
Identify potential shortages
Identify if too much cashflow which can be reinvested
Key to a good forecast (3)
Updated regularly
Allows for unexpected changes
Sensible assumptions
Problems with forecasting
Can be inaccurate, mistakes made
Unexpected events can distort massively
Factors influencing cash flow (4)
Transaction type-cash v credit
Seasonal demand
Nature of business e.g startup, supplier lead time, stock holdings
Type of good-e.g if purchased quickly after stocked e.g fresh food at butchers so money comes back quick
Causes of cash flow problems (5)
Sales lower than expected Costs higher than expected Took much stock-however needs to be enough Allowing customers too much credit Seasonal demand
How to improve inflows (4)
Credit control-chase payments, or discounts for earlier payment, penalties for late payment, debt factoring
Ways to delay outflows
Negotiate longer payment terms (payable days
