chapter 23 Flashcards
define profit
surplus after total cost has been subtracted from sales revenue
define cashflow
cash inflows and outflows over a period of time
how can a profitable business run out of cash
1.allowing customers a very long credit period
2.purchasing too many fixed assets at once
3.expanding too quickly
why is cashflow planning important to a start-up business
1.they are offered shorter credit periods
2.banks will expect payment at the agreed time, as they don’t trust the small business
what is included in section 1(cash inflows)
1.owner’s capital
2.bank loan payments
3.cash sales
4.trade receivable payments
5.sale of assets
what is included in section 2(cash outflow)
1.purchasing materials
2.purchasing assets
3.repaying loans
4.trade payable
5.rent
6.paying wages
what is included in section 3
1.net cashflow
2.opening balance
3.closing balance
what is net cash flow
difference each month between inflows and outflows
what is opening balance
amount of cash held by a business at the start of the month
what is closing balance
amount of cash held by a business at the end of the month
what are the uses of cashflow forecast
1.starting up a business
2.keeping the bank manager informed
3.managing an existing business
4.managing cashflow
limitations of cashflow forecast
1.mistakes can be made when preparing sales/cost forecast
2.drawn up by unexperienced entrepreneurs
3.unexpected cost increase
4.wrong assumptions based on poor market research
how to increase cash inflow
1.increase bank loans
2.reduce credit period time
3.insist on cash sales, however lose it’s competitiveness
4.debt factoring
how to decrease cash outflow
1.delay payment to suppliers, however supplier could refuse to supply again
2.delay or cancel purchase of capital equipment, however in long term could affect efficiency of business
if cashflow problem is long term:
1.attracting new investors
2.cutting costs
3.develop new products to attract new customers
