Cashflow

Question 1

Why produce a cashflow forecast?

Answer 1

• Advanced warning of shortages
• Make sure that the business can afford to pay suppliers and employees
• Provides reassurance to investors and lenders that business is being managed properly

Question 2

Cashflow forecast figures

Answer 2

Inflows – money coming in
Outflows – money going out
Net cash flow – (income – expenditure)
opening balance – Same figure as closing balance of previous month
Closing balance – opening balance + net cash flow

Question 3

Advantages of cashflow forecast

Answer 3

• Once set up, cash flow forecast can be produced very quickly
• Fewer mistakes will be made
• Comparisons with actual data can be carried out very easily
• Graphs can show figures visually

Question 4

Disadvantages of cashflow forecast

Answer 4

• One incorrect formula can have a huge impact on overall cash flow
• Staff need computer skills to use them
• Data can be lost or corrupt – back ups required
• Spreadsheets must be set up accurately

Question 5

Factors affecting cashflow

Answer 5

• Timings of cash flow – seasonal sales e.g. strawberry farm, timings of payments in and out
• Nature of business – Start-up capital and costs, time taken from input to output, holding too much inventory
• Unexpected changes in business

Question 6

Cause of cashflow problems

Answer 6

• Credit sales – Long payment terms, poor credit control
• Overtrading – Additional overhead and day to day expenses, increased capital expenditure, costs turn out to be higher than expected
• Internal management – stock control, relationship with suppliers, poor or inaccurate planning

Question 7

Improving cash flow

Answer 7

• Increasing the volume of the inflow of cash
• Speed up timing of the inflow of cash – capital invested, debtor payments, loans, cash sales
• Reducing volume of outflow of cash
• Slowing down the timing of the outflow of cash – outflows, loan repayments, day to day running expenses

Question 8

Difficulties in improving cash flow

Answer 8

• Damage to firm’s reputation
• Potential loss of customers if payments affect competitiveness
• Loss of discounts and need to offer discounts