The Importance of Cash Flashcards
All 10 cards in this deck
What is insolvency?
When a business cannot pay its debts when they are due, usually because it has run out of cash. It may be forced to close.
Give one effect of positive cash flow on a business.
Any one of: bills, wages and suppliers can be paid on time; the business may be able to take discounts for paying promptly; it can fund investment or expansion without borrowing.
What is cash?
Physical money in notes and coins, or money available in the business's bank accounts.
Why does a business need cash to pay its suppliers?
Paying on time keeps suppliers' trust — otherwise they may refuse to supply goods on credit.
Why does a business need cash to pay its employees?
Without the correct pay, employees may leave, increasing labour turnover.
Why does a business need cash to pay its overheads?
It must meet running costs such as rent; if it cannot, the business could close down.
Why can a business be profitable but still run out of cash?
Customers may not have paid yet while bills are due now, so cash leaves faster than it comes in.
What is the difference between cash and profit?
Cash is the money a business has available right now to pay its bills. Profit is what is left when total costs are taken away from total revenue over a period, whether or not that money has been received yet.
What is liquidity?
The ability of a business to turn assets into cash to pay its short-term debts and expenses.
Give two causes of cash flow problems.
Any two of: sales lower than expected; customers paying late or not at all; giving customers longer credit than suppliers give; high costs such as rent; buying too much stock; poor planning, so problems are not foreseen.