Cash Flow Forecasting Flashcards

All 15 cards in this deck

Give one reason why a business constructs a cash flow forecast.

Any one of: to identify the risk of negative cash flow in advance; to plan decisions such as employing staff or opening a branch; to compare actual cash flow against the forecast.

Give two examples of a cash inflow.

Any two of: receipts from sales; a bank loan; capital from the owner.

Give three examples of a cash outflow.

Any three of: raw materials; wages; insurance; rent.

What are the figures in a cash flow forecast usually based on?

Estimates of future sales and payments, often using past sales figures, market research and the owner's judgement, so the forecast may turn out to be wrong.

Name two ways a business can solve a cash flow problem.

Any two of: re-schedule payments (e.g. agree to pay suppliers later); arrange an overdraft; reduce cash outflows (e.g. cut costs); increase cash inflows (e.g. get customers to pay sooner); find a new source of finance.

To help cash flow, should the credit period a business gives its customers be longer or shorter than the credit period its suppliers give it?

Shorter. Customers then pay the business before it has to pay its suppliers, so cash arrives before it is needed.

What is cash flow?

The movement of money into and out of a business's bank accounts.

What is a cash flow forecast?

A prediction of the future flow of cash in and out of a business's bank accounts, usually for a 12-month period.

What is the formula for net cash flow?

Net cash flow = cash inflows − cash outflows.

What is the formula for the closing balance?

Closing balance = opening balance + net cash flow.

How is the opening balance of a month found in a cash flow forecast?

It is the closing balance of the previous month.

What does a negative closing balance in a cash flow forecast tell a business?

It will be overdrawn in that month — a period of cash shortage, so a remedy such as an overdraft is needed.

Is a negative net cash flow in one month always a problem for a business?

No. It may be temporary, such as stock bought before a busy season. Negative cash flow month after month is a serious problem.

How can a cash flow forecast help a business raise finance?

It shows the bank that the business has planned its future cash carefully, making a loan or overdraft easier to get.

How does a cash flow forecast provide targets for a business?

The forecast inflows and outflows become targets: managers aim to reach the forecast receipts and keep spending within the forecast outflows, then compare the actual figures with them.