5.2 Cash flow forecasting and working capital

Question 1

Why is cash important?

Answer 1

because it needs to be able to make payments to suppliers, production process, rent, wages etc.

Question 2

What is a cash-flow forecast?

Answer 2

An estimate of the future cash inflows and outflows of a business

Question 3

How to calculate net cash flow?

Answer 3

inflows - outflows

Question 4

How to calculate closing balance?

Answer 4

opening balance + net cash flow

Question 5

How to overcome short-term cash-flow problems?

Answer 5

Ask trade receivables to pay for more goods more quickly by offering discounts to customers
Negotiate longer credit terms with suppliers
Delay the purchase of non-current assets until the cash flow improves
Find other sources of finance for the purchase of non-current assets

Question 6

What is working capital?

Answer 6

measure the liquidity of the business
-> liquidity is the ability of a business to pay its short term debts.

Working capital is important for day-to-day expenses such as wages, buying raw materials etc.

Question 7

What does the length of the capital cycle depend on?

Answer 7

The level of inventories held by a business and how quickly suppliers are paid
How long it takes to produce goods for sale
How quickly business finds buyers for its products
Length of credit sales

Question 8

How can a business improve its working capital?

Answer 8

Decreasing length of credit sales
Negotiating long credit terms with suppliers
Reduce inventory levels (too much stock → reduction in profitability)