F5- Cash Flow

Question 1

What is cashflow?

Answer 1

The movement of cash into and out of a business over a given period of time.

Question 2

What is cash in?

Answer 2

A forecast of cash inflows including receipts from cash and credit sales.

Question 3

What is cash out?

Answer 3

A forecast of cash outflows including expenditure on direct costs and indirect costs.

Question 4

What is net monthly cashflow?

Answer 4

The forecasted changes to the business’ cash position fr that time period. Calculated by: cash inflows - cash outflows

Question 5

What is the closing balance?

Answer 5

The business’ cash position at the end of the time period. Calculated by: opening balance + net cashflow

Question 6

What is the opening balance?

Answer 6

The business’ cash position at the start of the time period. It is identical to the closing balance of the previous time period.

Question 7

What is a cashflow problem?

Answer 7

When cash out > cash in, so there is a negative net cashflow. This may lad to a negative closing balance and if persistent could lead to bankruptcy or administration.

Question 8

Overtrading

Answer 8

Rapid Growth
Excess cash going out, no cash in
Spending too much money

Question 9

Allowing too much trade credit

Answer 9

Large delay of cash coming in compared to cash going out
Affected by: no. of people. value of goods and length of time

Question 10

Timing of payments and receipts

Answer 10

Large delay between payments and receipts

Question 11

Poor credit control

Answer 11

No credit checks
Cash outflows without cash inflows

Question 12

Inaccurate cashflow forecasting

Answer 12

Lower cash inflows/higher cash outflows

Question 13

Stockpiling

Answer 13

Lots of cash out to suppliers, cash tied up in stock —> may become obsolete, too much raw materials in the worse due to the time until cash in
No enough cash coming in

Question 14

Fall in demand

Answer 14

Lower cash in due to lower sales

Question 15

Increased raw material costs

Answer 15

Higher cash out to suppliers

Question 16

Unexpected events eg. machinery breakdown

Answer 16

High cash out/lower cash in/mixture of both

Question 17

Investing too much in non-current assets eg. machinery, vehicles, property.

Answer 17

Lots of cash out
No/little cash in

Question 18

Seasonal product

Answer 18

Little cash in at times of the year when the product isn’t in season, whilst cash will still be going out for fixed costs.

Question 19

Importance of monitering cashflow.

Answer 19

Spotting issues early allows you to take action.
Essential to access the reasons in order to take the most appropriate action, eg. one off event, seasonal variations, or is there a trend developing eg, falling sales.

Question 20

What is working capital?

Answer 20

Money available to carry out day to day activities.

Question 21

Improved control of working capital

Answer 21

Sale and leaseback
Debt factoring

Question 22

Negotiate improved terms for trade credit

Answer 22

With suppliers
Increase payable days to delay cash going out
BUT may lose out on discount for cash purchase

Question 23

Offer less trade credit/discount to prompt payment

Answer 23

Brings forward cash in
Speeds up receivables, less receivable days
BUT may lose customers that can’t pay upfront

Question 24

Debt factoring

Answer 24

Immediate cash in to improve working capital
Reduces receivable days
Bad debts- customers that haven’t payed
BUT have to pay commission/fee so don’t receive the full amount of the debts.

Question 25

Overdraft/short-term loans

Answer 25

Negative closing balance, unexpected event or seasonal sales Ability to have greater cash in BUT interest rates, fixed amount, bank can withdraw it at short notice

Question 26

Sales and leaseback

Answer 26

Immediate cash in from asset sale to improve working capital BUT no longer own the asset, have to pay for the lease

Question 27

Spreading quarterly or annual payments

Answer 27

Small payments so less cash out each month BUT no reduction in the total, may only transfer cashflow problems to other months

Question 28

Don't stockpile

Answer 28

Only buy stock when needed: JIT stock management Reduces cash outflows to suppliers Less risk BUT cannot cope with demand surges and rely heavily on suppliers

Question 29

Diversify product range

Answer 29

Spread risk Seasonal products can complement each other Cash inflows from different products across the year BUT costly and time consuming

Question 30

Grow slowly not rapidly

Answer 30

Reduces cash outflows BUT risk of competition's success rather than your business

Question 31

Better market research to anticipate change

Answer 31

Improved cashflow forecasts Cash in and cash out more accurate More time to prevent cashflow problems BUT reliable research doesn't prevent changes in the external business environment i.e. PESTLE-C

Question 32

Benefits of managing cashflow well

Answer 32

Reduce borrowing costs- less need to overdrafts as you can take action early, lower interest rates and penalty charges Good relationship with suppliers- don't let them down, pay on time = more likely to receive a discount. Public relations- customers lose confidence if you are unable to meet orders- if you have cashflow problems this will only make things worse.

Question 33

Why are cashflow forecasts useful?

Answer 33

Arrange financial cover in advance eg. an overdraft See problems before they arise, time to make improvements Required when applying for a bank loan

Question 34

Limitations of a cashflow forecast

Answer 34

Only as reliable as the estimates they're based on Amounts and timings are estimated Managers should draw up a best case and worse case scenario and always be aware of the economic climate