3.7 Cash Flow

Question 1

Define Cash Flow

Answer 1

• The movement of money into and out of a business over a period of time
  • Measured by cash inflows and outflows, not profit
  • Ensures a business has enough liquidity to meet short-term obligations

Question 2

State 5 reasons for the importance of Cash Flow

Answer 2

✅ Helps avoid insolvency
✅ Ensures bills (e.g. wages, rent, suppliers) are paid on time
✅ Supports day-to-day operations
✅ Informs short-term decision-making
✅ Enables planning for shortfalls and surpluses

Question 3

Compare Cash flow VS. Profit

Answer 3

Cash flow
Definition - actual money moving in/out
Timing - immediate
Used for - liquidity planning

Profit
Definition - revenue minus expenses
Timing - can include non-cash items
Used for- measuring financial performance

Question 4

Main sources of cash inflows

Answer 4

Sales revenue (cash received from customers)
• Bank loans
• Share capital investment
• Interest received
• Sale of fixed assets

Question 5

Main sources of cash outflows

Answer 5

Payment to suppliers
• Wages and salaries
• Rent and utilities
• Interest on loans
• Loan repayments
• Purchase of equipment or inventory

Question 6

Define cash flow forecast

Answer 6

estimates future cash inflows and outflows to determine net cash flow and cash balances over a period (usually monthly).

Question 7

State 4 strategies to improve cash flows by reducing outflows

Answer 7

Reduce Cash Outflows
✅ Delay payments to suppliers
✅ Cut unnecessary costs
✅ Switch to cheaper suppliers
✅ Lease instead of buy fixed assets

Question 8

Formula net cash flow & closing balance

Answer 8

Net Cash Flow = Cash Inflows – Cash Outflows
Closing Balance = Opening Balance + Net Cash Flow

Question 9

Causes for cash flow problems

Answer 9

❌ Poor sales revenue or low demand
❌ Overtrading – expanding too fast without funding
❌ Excessive stock/inventory
❌ Late payment by customers (poor credit control)
❌ Seasonal demand

Question 10

State 4 strategies to improve cash flows by improving cash inflows

Answer 10

Improve Cash Inflows
✅ Encourage cash sales
✅ Chase debtors (customers who owe money)
✅ Offer discounts for early payment
✅ Inject capital (e.g. personal funds, investors)

Question 11

Limitation of cash flow forecast

Answer 11

❌ Based on estimates = can be inaccurate
❌ Unexpected changes in costs/revenue (eg. costs ⬆️ suddenly, sale drops bc market shifts)
❌ External shocks (e.g. regression, interest rate hikes)
❌ May not account for all variables (e.g. supply chain delays, late payments from customers)

Question 12

Uses of cash for forecasts

Answer 12

✅ Helps businesses plan for shortfalls
✅ Can guide budgeting decisions
✅ Assists in loan applications
✅ Identifies liquidity risks early

Question 13

Define insolvency

Answer 13

financial state where a person or firm can’t meet their debt payment on time —> eventually debt exceeds assets

Question 14

Define bankruptcy

Answer 14

legal process that happens when a person/firm declares that they can no longer repay their debts to creditors — attempt to liquidate their assets to pay of debt.

Question 15

Cash flow forecast format

Answer 15

Title: cash flow forecast fro (company name) fr fist x months of 20XX

Opening balance
Cash inflows
- Cash sales revenue
- Tax refund (rent / dividends
Total cash inflows

Cash outflows
- Rent
- Packaging
- Salaries & wages
- Cost of sales
- Heating and lighting
- Delivery
Total cash outflows

Net cash outflows
Closing balance