Business - 5.2 Flashcards
(26 cards)
cash flow - definition
refers to the movement of money in and out of a business, and is made up of the cash inflow and outflows over a period of time
cash flow - main idea
- doenst need to be physical cash
- needs to be paid immediately
cash inflows - definition
the sums of money RECEIVED by a business during a period of time
cash outflows - definition
sums of money paid OUT by a business during a period of time
problems businesses face during low cash flow
- unable to pay wages/rent/taxes
- production of goods / services will be stopped
- liquidation (selling everything it owns to pay debts)
5 ways for cash INflow
- sale of products in cash
- payments made by debtors
- borrowing money from external source
- sale of assets of business
- investors
5 ways for cash OUTflow
- purchasing goods and material for cash
- paying expenses in cash (wages, rent)
- purchasing non-current assets
- repaying loans
- paying creditors (suppliers that werent paid immediately)
cash flow cycle - definition
shows the stages between paying out cash for expenses (labour, materials) and receiving cash from the sale of goods
basic cash flow - 5 steps
cash needed to pay => pay expenses (wages, materials, rent) => good purchased => goods sold => cash payment received for goods sold
profit - definition
surplus after total costs have been subtracted from revenue
cash flow forecast - definition
estimate of future cash inflows and outflows of a business, usually month-to-month basis
purposes of cash flow forecast - helps manager by…
- amount of available cash for buying expenses (bills, repaying loans buying fixed assets)
- amount of borrowing needed
- possible use of money in the business for more profitable uses (having too much money)
uses of cash flow forecasts (4)
- starting up a business
- running existing business
- keeping bank manager informed
- managing cashflow
net cash flow - formula
inflow - outflow
opening cash balance - definition
amount of cash held by the business at the start of the month
closing cash balance - definition
amount of cash held by the business at the end of the month, and will become the next months opening cash balance
cash flow problems - causes
- low profits
- worse losses
- overinvestment
- over inventory
- allowing too much credit / credit period
- over trading
- unexpected changed
- seasonal demand
low cash flow - consequences
- restricted growth
- suppliers wont supply (lost trust)
- marketing deficiency
cash flow forecast - advantages (7)
- identify potential shortfalls in cash balances in advance
- makes sure that the business can afford to pay suppliers and employees
- spotting problems with customer payments
- able to do financial planning
- external stakeholders want it (prepared)
- analyse if business is achieving goals
- able to answer ‘what if’ questions abt income and expenses
cash flow forecast - disadvantages (6)
- outdated info
- only a prediction
- other factors that can invalidate it (internal and external factors)
- can be drawn up inaccurately
- can be under / over estimated
- inflows / outflows can fluctuate significantly with demand / supply
cash flow forecasting - process
identify cash in => identify cash out => calculate net cash flow => adjust bank balances
cash flow - improvements (6)
- cut costs
- cut stocks
- delayed payments to suppliers (can damage trust w suppliers)
- reduce credit / credit period with customers
- delay / cut expansion plans
- debt factoring
debt factoring - disadvantages
- short term solution
- can prevent business from dealing with core problem
- can be costlier than other short-term solutions
- will reduce profit margins
- will not received full amount owed
improving cash flow - method
- sale and leaseback (selling then renting)
- hire purchase (paying instalments)
- bank overdraft (short-term debt)
