UNIT 5. Chapter 27: Forecasting cash flows

Question 1

Def. Cash Flow

Answer 1

Record of the cash received by a business over a period of time and the cash outflows from the business.

Question 2

Def. Liquidation

Answer 2

When a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors

Question 3

Def. Iliquid

Answer 3

When a business cannot meet its short term debts

Question 4

Why is cash flow planning vital?

Answer 4

• New business start ups are usually given less credit periods - less time to pay suppliers.
• It is hard to convince banks or other lenders to lend if they have no trading record. There is also a need to pay back at the right times.

Question 5

Def. Cash inflows

Answer 5

Payments in cash received by a business, such as those from customers, debtors or from the bank. e.g receiving a loan.

Question 6

Def. Cash outflows

Answer 6

Payments in cash made by a business, such as those to suppliers and workers.

Question 7

Cash vs. Profit

Answer 7

Cash is not the same as profit. It is important to always have enough cash in the short term. Profit can wait to be earned in the long term - but cash payments are always being made.

Question 8

Structure of cash flow forecasts

Answer 8

pg. 496

or look in the notebook

Question 9

Def. Opening cash balance

Answer 9

Cash held by the business at the start of the month.

Question 10

Def. Closing cash balance

Answer 10

Cash held at the end of the month becomes next month’s opening balance.

Question 11

What are the causes of cash flow problems? (5)

Answer 11

• Lack of planning
• Poor credit control
• Allowing customers too long to pay debts
• Expanding too rapidly
• Unexpected events.

Question 12

Cash Flow problems: Lack of planning

Answer 12

Cash flow forecasting - planning the future ahead doesn’t prevent any cash flow problems from happening, but it can help prevent the cash flow problems from developing.

Question 13

Cash Flow problems: Poor credit control

Answer 13

If the credit control is inefficient, the debtors will not be ‘chased up’ for payment and potential bad debts will not be identified.

Question 14

Def. Credit control

Answer 14

Monitoring of debts to ensure that credit periods are not exceed.

Question 15

Def. Bad debt

Answer 15

Unpaid costumers’ bills that are now very unlikely to ever be paid.

Question 16

Cash Flow problems: Allowing customers too long to pay debts

Answer 16

By allowing customers to pay on credit, it will aid the competition of the business against others. However letting customers too long to pay means reducing short term cash inflows, which would lead to cash flow problems.

Question 17

Cash Flow problems: Expanding too rapidly

Answer 17

When the business expands rapidly, it has to pay for expansion and increased wages… => overtrading would lead to cash flow shortages.

Question 18

Def. Overtrading

Answer 18

Expanding a business rapidly without obtaining all of the necessary finance so that a cash flow shortage develops.

Question 19

Cash Flow problems: Unexpected events

Answer 19

Unforeseen increases in costs - a breakdown of a delivery van that needs to be replaced etc. could lead to negative monthly cash flows.

Question 20

Ways to improve cash flow? (2)

Answer 20

• Increasing cash inflows

* Reducing cash outflows

Question 21

Ways to increase cash inflows? (4)

Answer 21

• Overdraft: Flexible loans businesses can draw up
• Sale of assets: Cash receipts obtained from selling redundant assets
• Reduce credits terms to customers: Shorten the period of time
• Debt factoring: Companies offering immediate cash from the debt

Question 22

Ways to reduce cash outflows? (4)

Answer 22

• Delay payments to suppliers/creditors: Take longer to pay back to decrease short term cash outflows
• Delay spending on capital equipment
• Use leasing instead of purchasing equipment
• Cut overhead spending that does not directly affect output e.g. promotion costs

Question 23

Ways to manage working capital?

Answer 23

4 components need to be managed:
• Debtors
• Creditors
• Inventory
• Cash

Question 24

How to manage debtors? (3)

Answer 24

• Not extending credit to customers -extending it for shorter time periods
• Selling claims on debtors to specialist financial institution acting as debt factoring
• By discovering whether new customers are creditworthy

Question 25

How to manage creditors?(2)

Answer 25

• Increasing the range of goods and services bought on credit
• Extend the period of time taken to pay

Question 26

How to manage inventory? (3)

Answer 26

• Keeping smaller inventory levels
• Using computer systems to record sales and inventory levels to order as required
• Just in time production method

Question 27

How to manage cash? (3)

Answer 27

• Use cash flow forecasts
• Wise use of investment of excess cash
• Arranging overdrafts when there might be too little cash