Booklet 9:Cash Flow/Cash Flow Forecast

Question 1

Explain the difference between Cash and Profit? (4)

Answer 1

Cash is the cash flow in and out of the business, whereas profit is calculated as the difference between all revenues and costs (cash and non-cash expenses) incurred by the business.

Question 2

What is Cash Flow? (4)

Answer 2

Cash flow is the movement of cash into and out of a business over time.

Question 3

How to control cash flow? (4)

Answer 3

To control cash flow credit businesses must therefore operate in credit.

Question 4

3 ways to improve cash flow in both the short and long term (8/10)

Answer 4

1.Monitoring cash flow, not profits
2.Selling assets not currently being used
3.Collecting trade receivables on time

Question 5

What is a Cash Flow Forecast? (4)

Answer 5

A cash flow forecast predicts the level of spending and level of income which the business will have during the following period of time.

Question 6

3 purposes of a Cash Flow Forecast? (4)

Answer 6

1.Enables the owner or manager to plan the firm’s expenditure
2.Shows the amount required and when it is needed
3.Shows when loans could be repaid

Question 7

2 advantages and 2 disadvantages of the importance of a Cash-Flow Forecast. (18)

Answer 7

Advantages
1.Helps management identify periods of cash shortfall enabling immediate action to maintain paying bills on time
2.May be used to obtain finance from banks and tenders

Disadvantages
1.All figures are predictions
2.Income can increase/decrease based on demand and supply changes