5.2 - cash-flow forecasting and working capital

Question 1

why is cash important to a business?

Answer 1

if a business runs out of cash, it will not be able to:​
1. pay its employees- this leads to employees going on strike and so output is stopped ​
2. pay its suppliers- this leads to suppliers not supplying materials and so the business can not produce their products

Question 2

what is a cash flow forecast?

Answer 2

a prediction if a firm’s cash inflows and out flows. ​

Question 3

what are cash inflows(reciepts)?

Answer 3

cash received by a business e.g., money from sales, money from a bank loan, money from debtors (people who owe the business money-suppliers)

Question 4

what are cash outflows (payments)?

Answer 4

money paid out by the business ( Paying suppliers- creditors , paying rent, paying wages, paying bill, repaying loans

Question 5

what is net cash flow?

Answer 5

cash inflow - cash outflow

Question 6

what is opening balance?

Answer 6

money the business has at start of the month – It is found by calculating the closing balance of the previous month

Question 7

what is closing balance?

Answer 7

money the business has at the end of the month. (net cash flow + opening balance)

Question 8

complete a cash flow forecast

Answer 8

check teams

Question 9

what is the importance of a cash flow forecast (CFF)?

Answer 9

• if the business wants to obtain a loan, they will have to show the bank the CFF so they can show they are able to pay the loan back ​
• important when starting a new business- Starting a business is expensive as they need to pay for advertising, machinery, premises and market research. A CFF will help highlight huge cash outflows so a business can solve these issues e.g., by taking out a loan to cover these costs ​
• managing cashflow- If the closing balance is too high, this may be a waste as this money could be used better elsewhere e.g., paying off loans to help reduce interest rates or to pay suppliers immediately to avail of discounts

Question 10

how can cash flow problems be solved?

Answer 10

• increase/overdraft bank loans to inject more cash into the business and increase cash inflow ​
• delaying payment to suppliers(Trade Credit) so cash outflows decrease in the short term​
• ask debtors (creditors) to pay quicker, not offering them trade credit so cash inflows increase in the ST ​
• cancel purchasing equipment leading to lower cash outflows

Question 11

what is working capital?

Answer 11

capital available in the ST to pay day to day expenses e.g.. Suppliers, bills, rent ​

WC= Current Assets – Current liabilities

Question 12

why is working capital important?

Answer 12

so the business can pay suppliers and loans.