5.2d - Cash Flow

Question 1

Cash flow forecasting definition

Answer 1

The process of estimating the expected cash flows over a period of time

Question 2

Cash-flow cycle definition

Answer 2

The regular pattern of inflows and outflows of cash within a business

Question 3

What does the length of the cash-flow cycle depend on?

Answer 3

• Type of product (some take longer to produce and are held in stock for longer)
• Credit payments

Question 4

Liquidity definition

Answer 4

The ability to convert an asset into cash without loss or delay

Question 5

Advantages of cash-flow forecasting:

Answer 5

• Identify potential shortfalls in cash balances in advance
• Makes sure that business can afford to pay debts
• Helps raise external finance

Question 6

Why can their be inaccuracies in cash-flow forecasts?

Answer 6

• Changes in the economy
• Changes in consumer tastes
• Inaccurate market research
• Unexpected competition

Question 7

Disadvantages of cash-flow forecasts:

Answer 7

• Sales can be lower than expected
• Customers may not pay on time
• Costs may be higher than expected

Question 8

How can a business improve its cash flow?

Answer 8

• Overdrafts
• Hold less stock
• Reduce time between paying suppliers and getting money from customers
• Debt factoring
• Sale and leaseback

Question 9

What are the two different versions of cash-flow forecasts?

Answer 9

• Best case

- Worst case