Cash Flow

Question 1

cash flow

Answer 1

money that flows in and out of a business

Question 2

positive cashflow

Answer 2

will enable the firms to fulfil its day-to-day running costs

Question 3

cash inflow

Answer 3

money received by business

Question 4

cash outflow

Answer 4

money paid out by the business in a determined period of time

Question 5

why is profit different from cash flow

Answer 5

profit indicates the amount of money left over after all expenses have been paid, cash flow indicates the net flow of cash into and out of a business

Question 6

profit

Answer 6

positive difference between the total revenue and the costs

Question 7

insolvency

Answer 7

when a business runs out of cash but is still profitable

Question 8

insolvency can occur when

Answer 8

• The firm allowed costumers very long credit periods
• Paying suppliers too early, leaving the firm with little or no cash
• Buying new equipment or new assets in that particular month
• Paying the firms debt with the cash (in that month)
• Buying too much stock with cash that is supposed to cover other costs of the business (also know as overtrading)

Question 9

cash

Answer 9

• money that gets into the business in the form of: sale of goods, investment by shareholders and funds from financial institutions (i.e. banks).
• is needed to pay day-to-day bills, such as wages, electricity, payment to suppliers, etc.
• cash is the most liquid asset of the business and it is found in current assets in the Statement of Financial position (Balance Sheet).
• lack of cash can lead to bankruptcy of the business.

Question 10

opposite of insolvency

Answer 10

Have a positive cash flow but be unprofitable – the business will have a lot of cash but the sales are not enough to generate profit. This cash can come from different sources such as:
- bank loans
- sale of some fixed assets for the business
- from shareholders

Question 11

cash flow forecast

Answer 11

financial document that shows the expected monthly movements of cash inflows and cash outflows of a business.

Question 12

most important terms for a cash flow forecast

Answer 12

• opening (cash) balance
• total cash inflows
• total cash outflows
• net cash flow
• closing (cash) balance

Question 13

opening (cash) balance

Answer 13

amount of cash the business has at the beginning of every trading period (i.e. Month). The opening balance is the same value as the previous months’ closing balance.

Question 14

total cash inflows

Answer 14

sum of all the inflows of a particular month (i.e. payments made by debtors, loans from banks, income from renting any property, sales of a fixed asset, etc.)

Question 15

total cash outflows

Answer 15

refers to the total cash that leaves the business in a particular month (i.e. rent, bills to be paid, wages, taxes, payment to creditors, etc.)

Question 16

net cash flow

Answer 16

difference between cash inflows and cash outflows. This figure should ideally be positive although it is possible that it would be negative if a business is suffering cash flow problems.

Question 17

closing (cash) balance

Answer 17

estimated cash available at the end of every month. Its is calculate by adding the Net cash flow of one month to the opening balance of the same month.

Question 18

advantages of cash flow forecast

Answer 18

• very useful document for anyone that wants to “start-up” a business, providing estimated projections.
• Allows a business to see when they might need a loan or any other type of finance. If positive, the firm can show its solvency to investors (i.e. Banks)
• Helps to plan for any unexpected bills/payments they may have in the future. Allowing managers to plan for the future.
• Helps compare predicted figure with actual figures so the business can assess where the problems lie.

Question 19

disadvantages of cash flow forecast

Answer 19

Only accounts for a small portion of the year

Only a rough estimate, not very accurate

May not take into account payments that will affect the business in the future

Question 20

difference between cash flow forecasts and cash flow statement

Answer 20

A cash flow statement is a financial document that shows the details of actual cash inflows and cash outflows of the business, for a period of time.
It can be used TO HELP prepare the cash flow forecasts, which are PREDICTIONS of the cash flows.

Question 21

The aim of every business is to keep a ‘healthy’ cash balance, however sometimes the firm can face some cash flow problems, such as:

Answer 21

• overtrading
• overborrowing
• overstocking
• poor credit control

Question 22

overtrading

Answer 22

when a business tries to expand to quickly or aggressively without sufficient resources to do it.

Question 23

overborrowing

Answer 23

the more money the firm borrows the more interest they will have to pay (on top of the actual debt)

Question 24

overstocking

Answer 24

when a firm holds too much stock as a result of an ineffective stock control

Question 25

poor credit control

Answer 25

when the firm offers costumers an extended credit period.

Question 26

what is investment?

Answer 26

• refers to the act of spending money on purchasing an asset with the expectation of future earnings.
• involves wealth creation including the hope that the bought asset value grows overtime.
• some examples of some financial investments are: buying stocks, bonds or property. All investments are risky specially if there a changes in the market.

Question 27

What are the strategies to deal with cash flow problems?

Answer 27

Reducing cash outflows
Improving cash inflows
Seeking alternative sources of finance

Question 28

reducing cash outflows

Answer 28

Negotiate late payment with suppliers and creditors
Purchases of fixed assets can be delayed
Decrease some expenses
Source from cheaper suppliers
Leasing rather that buying

Question 29

improving cash inflows

Answer 29

Cash payments only
Create incentives for creditors to pay early
Diversify the product on offer
Change pricing policy

Question 30

seeking alternative sources of finance

Answer 30

Selling fixed assets
Overdrafts
Sale and lease back
Debt factoring
Government assistance