Cash flow Flashcards
(11 cards)
What functions does cash perform in a business?
Cover regular operating expenses, e.g. workers pay supplier invoices and overheads
Meet unexpected expenses, such as replacement of broken equipment
Why is cash flow important?
It’s the liquid asset in the form of notes, coins, and money without your business can survive.
A new business may have to pay cash on purchase for all suppliers as they don’t trust enough
Cash in flow
The money they receive and generated from business revenue after a business sells the product. Established businesses need to ensure they manage cash flow to ensure they do not run out of money.
Cash flow issues
Unable to pay key stakeholders
Production is likely to seize his workers will not work without pay
Unable to pay utility bills and rent
Cash flow forecast
Prediction of the anticipated cash inflows and outflows usually is 6 to 12 month. Period.
Cash inflows include income from sales loan sums received from the bank
Cash out flows include payments for stock, staff, wages, salary, rent, utility bills and repayment
Why do business plans usually include cash flow forecast
Provides evidence for investors or lenders that finances require required
Allows owners or managers to make plans to cover cash for short falls
What is average rate of return?
Helps a business determine whether an investment will be worthwhile. It compares average profit generated each year with the cost of investment.. higher outcome greater return on investment
Break even analysis
Financial tool used to determine the number of units of business must sell to reach a point where revenue equals its expenses. Helps business understand minimum level of sales or outputs. They need to achieve in order to cover all costs.
Fixed costs and variable costs and total cost
Do not change, regardless of level of production or sales
Variable vary with the level of production or sales
Total the sum of fix and variable cost at a particular level of output
Revenue is the money gained from selling products
Benefits of breakeven
- help identify the level of sales required to avoid losses and provide a target for achieving profit
- helps identifying fixed and variable costs and their impact
- Can help a decision making as it helps weighing up potential risks and rewards associated with the decision
Limitations of break even analysis
- less useful where business produces more than one product
- Assume that all output is sold
- accuracy relies upon quality of data used in breakeven calculations
