Cash Flow Flashcards
All 23 cards in this deck
What is cash in a business?
Money in notes, coins and bank accounts that is available to the business.
What is cash flow?
The movement of money into and out of a business' bank accounts.
What is insolvency?
When a business runs out of cash and can no longer pay its bills.
Give one benefit of a positive cash flow position.
Reduced risk of insolvency and business failure — bills, wages and suppliers can be paid without borrowing.
True or false? A business that is making a profit can still run out of cash.
True. Profit can be tied up in stock or in customer invoices that have not been paid yet, while bills are already due.
What is a cash flow forecast?
A prediction of future cash inflows and outflows over a period of time, usually 12 months.
Give two examples of cash inflows in a cash flow forecast.
Money from sales, plus items such as rent received or a loan paid into the business.
Give two examples of cash outflows in a cash flow forecast.
Payments to suppliers and wages to employees, plus overheads such as rent and insurance.
What is the formula for net cash flow?
Net cash flow = total cash inflows − total cash outflows.
What are the steps to calculate total cash inflow for a month?
e.g. a shop sells 50 coats at £40 each and also receives £500 in rent- Work out the inflow from each source (units × price): 50 × £40 = £2000
- Add all the inflows together: £2000 + £500 = £2500
Total cash inflow = £2500
What are the steps to calculate the closing balance for a month?
e.g. total inflows £8000, total outflows £5000, opening balance £2000- Net cash flow = inflows − outflows: £8000 − £5000 = £3000
- Closing balance = net cash flow + opening balance: £3000 + £2000 = £5000
Closing balance = £5000
What is the purpose of a cash flow forecast?
To predict future cash inflows and outflows so the business can see when cash shortages are likely and plan staffing, expansion and investment.
What does a forecast negative closing balance for a month tell a business?
It will not have enough cash to pay its bills that month, so it must arrange an overdraft, borrowing or extra finance in advance.
Why do start-ups often suffer cash flow problems?
Large amounts must be spent on equipment, stock, rent, insurance and training before any sales revenue comes in.
Why can rapid growth cause a cash flow problem?
Cash outflows for extra stock, staff and equipment happen before customers pay for the extra sales.
What effect does it have on a business if a few large customers fail to pay on time?
Cash inflow is severely reduced, so the business may be unable to pay its own suppliers, wages and overheads.
What is an overdraft?
An agreement with the bank allowing a business to overspend on its account.
What is meant by re-scheduling payments as a solution to cash flow problems?
Changing when money is paid out or received — e.g. negotiating longer credit terms with suppliers so cash leaves the business later.
Give one way a business could reduce its cash outflows.
Cut costs and overheads, e.g. move to cheaper premises or delay buying new equipment.
Give one way a business could increase its cash inflows.
Offer customers a discount for paying quickly, or give less credit to customers so cash comes in sooner.
Give one new source of finance a business could use to solve a cash flow problem.
A bank loan (other options include selling shares or selling unused assets).
True or false? An overdraft is the best long-term solution to a cash flow problem.
False. An overdraft is a short-term fix and interest is expensive; ongoing problems need lower outflows, higher inflows or longer-term finance.
True or false? If a business has a negative net cash flow in a month, its closing balance for that month must also be negative.
False. A large enough positive opening balance can keep the closing balance positive.