UNIT 5 - Chap 23: Cash Flow Forecasting & Working Capital Flashcards
Why is CASH important to a Business?
If a business runs out of cash, it will not be able to :
- Pay its employees- this leads to employees going on strike and so output is stopped
- Pay its suppliers- this leads to suppliers not supplying materials and so the business can not produce their products
What is the definition of a cash flow forecast?
is a prediction if a firm’s cash inflows and out flows.
What is the definition of Cash Inflow (receipts)?
cash received by a business e.g., money from sales, money from a bank loan, money from debtors (people who owe the business money-suppliers)
What is the definition of Cash Out Flows (Payments)?
money paid out by the business ( Paying suppliers- creditors , paying rent, paying wages, paying bill, repaying loans
What is the formula for Net Cash Flow?
= Inflow – outflow
What is the definition and formula for Opening Balance?
Money the business has at start of the month – It is found by calculating the closing balance of the previous month
What is the formula for Closing Balance?
= Net Cash Flow + Opening Balance
The Importance of CFF? (3)
- IF the business wants to obtain a loan,
- Important when starting a new Business
- Managing cashflow
Explain in detail what obtaining a loan is?
they will have to show the bank the CFF so they can show they are able to pay the loan back
Explain in detail why CFF is important when starting up a new business?
Starting a business is expensive as they need to pay for advertising, machinery, premises and market research. A CFF will help highlight huge cash outflows so a business can solve these issues e.g., by taking out a loan to cover these costs
Explain in detail why a CFF is important for managing cash flow?
If the closing balance is too high, this may be a waste as this money could be used better elsewhere e.g., paying off loans to help reduce interest rates or to pay suppliers immediately to avail of discounts
How improve cash flow problems? (4)
- Increase overdraft/bank loans to inject more cash into the business and increase cash inflow
- Delaying payment to suppliers (Trade Credit) so cash outflows decrease in the short term
- Ask debtors (creditors) to pay quicker, not offering them trade credit so cash inflows increase in the ST
- Cancel purchasing equipment leading to lower cash outflows
What is the definition of working capital?
Working capital is capital available in the ST to pay day to day expenses e.g.. Suppliers, bills, rent
What is the formula for working capital?
= Current Assets – Current liabilities
What 2 things is working capital important for?
- Suppliers
- Loans
