Cash Flow Flashcards
(17 cards)
Cash how
Cash flow is the money coming into a business (the income or inflows) and the money going out of the business (the expenditure or outflow) for a business to make a profit, more money needs to be flowing in then out
Cash flow forecast
A cash flow is a prediction of the future flows of money in and out of the business for a specified period. A cash flow forcast shows, month by month, the money that it is anticipated will be coming into the business and the money that the business will be paying out.
Inflows and outflows
The business will need to have an understanding of all the money coming in to the business (inflows) and all of the money going out of the business (outflows).
Why is cash so important
Often called the ‘lifeblood’ of a business. This is because just like a human couldn’t survive with blood flowing, a business could not survive without good cash flow
- invest in the business
- pay for its expenses
- as a result of these things, hope to make a profit.
Why business forecast cash flow
- Decide whether to expand or reduce existing activities
- decide whether to produce new goods or services, invest in new resources or carry out new activities.
- identify any potential deficits and allow the business to plan ahead for them
Identify any potential surpluses so that the business can use this money to their benefit
Total income
Cash inflows, including relents, income, loans, revenue.it is the total cash coming into the business.
Total expenditure
Cash outflows, including wages, rent, bills. It is the total cash going out of the business.
Opening balance
The amount of money held by the business at the start of the month. it is the closing balance of the previous month.
Closing balance
The amount of money held by the business at the end of the month.it is the opening balance of the next month.it is calculated by adding the opening balance and the net cash flow.
Net cash flow
Total cash outflows (total spending) - total cash inflows (total receipts)
Cash flow problems
If more cash leaves the business than comes in then this can mean the business could run out of cash.
If the closing balance is negative this means there is no money in the bank and has run out of cash which leads a business to fail. If a cash flow forecast shows that the business will run out of money, then charges can be made such as increasing revenue, reducing costs or putting more of the owners money into the business if a bigger bank loan cannot be agreed-if the cash flow shows that eventually the business will be profitable then it is worth investigating these options to overcome the short-term cash flow problems.
What affects cash flow
- Sales can change: different seasons affect demand so sales revenues fluctuate
- costs can change: the cost of gas/electricity can rise or fall. Wages rise each year and stock costs change. keep costs under control to avoid cash flow problems.
- credit terms can change: these need to be paid so suppliers don’t cut the business off.
- stock levels can change: increasing stocks without increasing sales will lead to a worsening of the cash flow position. All stocks held need to be paid for regardless of whether they are sold or not.
Payables
Money that is owed by the business to its suppliers. in other words debts of the business. Regarded as current liability as it needs to be paid within one year. it will appear on the statement of financial position (balance sheet).
Receivables
Money owed to the business by its customers. This is regarded by the business as a current asset (likely to be paid in one year). Normal for businesses to trade
With each other on credit it will appear on the statement of financial position (balance sheet).
Analyse the timing of cash inflows and outflows
When a business is managing their cash flow they need to make sure that the receivables are greater or equal to the payables. in other words the business should be expecting to receive in cash more than it needs to pay out on its bills. If receivables increase overtime this means the business is not efficient in chasing its debts.
Analyse the timing of cash inflows
- if cash coming into the business is too slow (late payments from customers) then this can cause cash flow problems.
- The business may decide to offer discount for early payments or a penalty (fine) for late payments
- their credit control department will need to chase late payments.
Analysing the timing of cash outflows
- If cash flows out of a business too quickly then this can cause cash flow problems.
- The business may wish to negotiate a longer payment term with suppliers which offer more favourable terms.
