LOE

Question 1

What is a cash flow forecast

Answer 1

A document that helps estimate the amount of money that will move in and out of your business.
A healthy cash flow means that the business can meet its short term outflows when needed for example if the business has a heathy cash they will be able to pay wages on time each month.
It is vital for businesses to understand therir cash flow. Forecasting it plays an important roles in finances.

Allows business to pay its stakeholders such as suppliers and employees on time,
Create a document that can be used to help receive funding from potential investors and banks.
Take corrective action when areas of concern are identified.

Question 2

Inflow/recipts

Answer 2

As mentioned a cash flow forecast investigates the future inflows and outflows of a business. If the business has greater inflows than outflows than it is considered to have a heathly cash flow.
Common inflows are
Cash sales
Credit sales
loans
Capital introduced
Sales of asset
Bank interest recievef

These are sums of money that the business receives and have a positive effect on the business financially and on their cash flow

Question 3

Types of inflow

Answer 3

Cash sales
Credit sales
Loans
Capital introduced

Question 4

Cash sales

Answer 4

Sales made in cash or by card that are received by the seller at the time of
Purchase or delivery basically when something is sold by the buissness they receive the money immediately.

Question 5

Credit sales

Answer 5

Sales where payments are not made until servers days or weeks after product was purchased.

Question 6

Loans

Answer 6

A bank loan is an inc,or for business. They may require the money purchase assets such as equipment, vehicles or machinery

Question 7

Capital introduced

Answer 7

When a business owner invests their personal money,stock or asset in the business. Most common when a buisness starts or is expanding.

Question 8

Sales of asset

Answer 8

Method increasing inflows to the business by selling assets owned by the business for cash to then use within the business.
E.g a buimau sell a building they no longer need for£100000 then can then use this cash injrcyion to fund other aspects of their business.

Question 9

Bank interest

Answer 9

Interest paid by the bank on credit balances
If business has a positive balance of £100000 in the bank and receives 2% interest then that £2000 is classed as an inflow.

Question 10

Outflows

Answer 10

Opposite to inflows are outflow are money leaving a buissness. A business is considered unhealthy if its cash flow is greater than its cash inflow.

Question 11

Common cash outflows

Answer 11

Cash purchases
Credit purchases
Rent
Rates
Salaries
Wagas utilities
Purchase of assets
Value added tax VAT

Question 12

Cash purchase

Answer 12

These are item that the business purchase es and pays for them at the time of the purchase.

Question 13

Credit purchases

Answer 13

Items that have been brought by a business but then paid for at a later date. A business may purchase a new machine and then 30 days later pay the amount charged for the machine. Whereas if this was a cash purchase the amount would be paid immediately.

Question 14

Rent

Answer 14

This is a regular payment made to a landlord usually in exchange for the use of a premises

Question 15

Rates

Answer 15

Business rates are a tax on property used for business purposes. They’re charged on properties lope offices, shops,pubs, and warehouses. Most non-do estimates properties will attract business rates.

Question 16

Salaries

Answer 16

A salary is an outflow that is a fix ed regular payment to an employee. Salaries are typically paid on a monthly basis but often expressed as an annual sum, made by an employee to an employee, especially in professional industries.

Question 17

Wages

Answer 17

Wages are similar to a salary in terms of them being paid to an employee. However a wage is usually based on hours worked, for example a a worker paid a wage might get £10 an hour and those hours of work may vary and so will the pay. Whereas a salary is a fixed rate for the year as mentioned above

Question 18

Utilities

Answer 18

Utility bills is an umbrella term that includes your electricity, gas and water usage and costs. It can also include bills that for essential services such as those provided by the council, like sewer services. Optional services such as cable to or mobile phones are not considered to be utility bila.

Question 19

Purchases

Answer 19

This refers to the purchase of non current assets that a business is likely to keep for more than a year such as vehicles, ,achinerry, land and property.

Question 20

Value added to tax VAT

Answer 20

Nuissmess that are vat registered must pay VAT to HMRC. This pay, et should be shown on a cash flow forecast.

Question 21

Bank interest

Answer 21

An interest that is incurred due to borrowing money is also an outflow

Question 22

The importance of creating a cash flow forecast

Answer 22

Creating a cash flow forecast is not the end point of a cash flow.
Once it’s completed then it is important to analyse what the cash flow is showing and then revise it where possible to ensure the business has a healthy cash flow.

Question 23

Key element number. Of a cash forecast 1.Opening balance

Answer 23

How much is available at the start of the month

Question 24

2.Total inflows

Answer 24

All the inflows added together for that mknth

Question 25

3.Closing balance

Answer 25

Total cash available- total outflows

Question 26

4.Total cash available

Answer 26

Opening balance + total inflows

Question 27

Total outflows

Answer 27

All the outflows added together for that month

Question 28

Use of cash flow forecast

Answer 28

Planning Control Monitoring Target setting

Question 29

Planning

Answer 29

A cash flow forecast can be used as a planning tool to see what the business inflows and outflows are. It can be used to put a plan in place to either utilise cash surplus or manage months were their cash flow is negative. It heals idnetify where most of your inflows and outflows are coming from. Where these are not Ada queue it allows the business to put a plan in plan in place to help rectify a cash flow issues.

Question 30

Monitoring

Answer 30

A cash flow forecast needs to be monitored closely in line with the actual cash fro of the business .

Question 31

Control

Answer 31

Areas of concern occur the business can then try to control this by attempting to increase inflows or decrease outflows. Without the cash flow forecast the business would not be able to control any cash flow issues until they has occurred.

Question 32

Target setting

Answer 32

H completing a cash flow it can help a business to set targets based on what has been identified in the fore cast. Depending on what the business identifies in its cash flow will dictate what targets they. It may be clear that certain months the business does not make enough sales due to it being a seasonal business. Therefore they may set a target of diversifying their product portfolio in order to achieve greater sales in months where their core business does not achieve well. Alternatively, the business may identify that their expenses are the problem and that they may need to reduce rent payments or wages. Each of these could be set as targets to them improve the business cash flow.

Question 33

Problmens with cash flow forecast

Answer 33

Outflows greater then inflows Inconsistent cash flow throughout the year r (cash flow cycle) for seasonal business

Question 34

Solution to cash flow problems

Answer 34

Overdraft arrangements Negotiating terms with creditors Reviewing and rescheduling capital expenditure

Question 35

Overdraft arrangements

Answer 35

Business with fluctuating cash flows due to its nature of their business would benefit from arranging an overdraft with their bank in order to be an,e to continue trading effectively in the periods where cash flow reduces. Often when tix overdraft is pre arranged it can be obtained with 0% interest and is an inexpensive option if cash fluctuates.

Question 36

Negotiating terms with creditors

Answer 36

Creditors are people or businesses that the business owes money to. Standard payment terms are usually 30 days. However if the business needs to improve its cash flow then they may be ab negotiate these terms and extend their terms from. 30 days to 60 or 90 days. This will improve the business cash flow as they would be holding onto their money for longer.

Question 37

Reviewing and rescheduling capital expenditure

Answer 37

If cash flow issues are identified then postponing or rescheduling capital expenditure could help improve the forecast, It may identify that new piece of machinery or scheduled maintenance of a building may not be vital and therefore this could be postponed to a time when cash flow has improved. It may aldo be a better option in terms of cash flow to lease machinery or vehicles and spread the cost over months rather than having a large expense all at one point in time.

Question 38

Benefits of a cash flow forecast

Answer 38

Allows the business to track inflows and outflows Helps monitor cash flow and anticipate where corrective action needs to be taken Can be used as part of a business plan to help secure finances Track whether actual spending is close robyiur cash flow forecast

Question 39

Limitations of cash flow forecast

Answer 39

Based on a forecast therefore could not be accurate Unforeseen changes can impact the forecast such as change in material cost Sales are significantly lower than expected Takes time to produce

Question 40

Variable costs

Answer 40

These are costs that vary with the level of output. For example raw materials. The more product a buisdness makes the higher the cost of raw materials will be. If the business makes one product it the cost of raw material will be significantly lower than id 1 million products were made.

Question 40

What is break even

Answer 40

The different dusts AB’s sales terminology used in break even write them down in your booklet, along with an explanation and an example Break even occurs wren income id exactly equal to expenditure thus showing neither profit nor loss. A company break even if it doesn’t make a profit or a loss Into make a profit income must be higher then expenditure. .

Question 40

Costs can be categorised in 4 ways

Answer 40

Variable costs Fixed costs Semi- variable costs Total costs

Question 41

Fixed costs

Answer 41

Do not very with the level of output. For example, regardless how ,any items a business produces they will still need to pay the sane amount of rent fir their premises.

Question 41

Semi- variable costs

Answer 41

These costs are composed of a mixture of both fixed a vid variable components. Costs are fixed for a set level of production or consumption and become variable rafter this level is exceeded. An example would be a mobile phone. Fixed fee of say £50 a month for so many ,inures,text and data. Whether you used 10 or 100 minutes the fee is fixed. However if you exceed your minutes, text or data you will be charged a variable fee on top of this fixed fee.

Question 42

Total costs

Answer 42

Total amount of your fixed and variable costs added together. Total, costs = fixed costs + variable costs

Question 43

Sales can be categorised into 4 ways

Answer 43

Total revenue Selling price per unit Sales in value Sales in volume

Question 44

Total revenue

Answer 44

Amount of money coming into the business from the sake of its products or services. It is simply the wuantity sold multiplied by the selling price.

Question 45

Selling price per unit

Answer 45

The amount a customer pays per unit bought

Question 46

Sales in value

Answer 46

The total amount of sakes made expressed as a monetary value such as £ fir example we sold £10000 of goods

Question 47

Sales in volume

Answer 47

This is the amount of sales expressed as a quantity I.e 1000 units were sold.

Question 48

Break even an be used as a management tool to do the following

Answer 48

Planning Monitoring Control Target setting.

Question 49

Planning

Answer 49

Sets budgets so that the break even pint is not hampered by costs Can be used as a part of a business plan to demonstrate to lenders what point the business will break even bad their capacity for profit. Can be used to plan pricing strategies as the price set can impact the break even point either positively or negatively

Question 50

Monitoring

Answer 50

Monitor progress in relation to the break Cerberus point. Has the business broke even yet or not? Monitor the impact of changing prices or changes in costs By monitoring the changed in revenue tragedies costs it allows the business to take avyion and rectify the problem

Question 51

Control

Answer 51

Use break even to control costs and see if they are being kept within budget, Motivate employees to active targets that have been set and controlled based on the break even point Control pricing and snsure djscounts given do not hinder progress to breaking even.

Question 52

Target settingv

Answer 52

Once break even point is identified targets can be given to individuals that are calculated to egsure the break even point is met in a timely fashion. Set target based on expenditures so that expenditure does not negstiveky impact progress towards breaking even Set production targets that will enable certain level of profit to be made once the break even point has been reached.

Question 53

Advantages of break even

Answer 53

Clear targets of how many items the business needs to sell to Break even Informs pricing strategy Easy to set targets Can be used in a way to set target to motivate employees Shows profit and loss at diffferent level of output Can help identify where costs are to high and corrective action can take place. Clearly shows fixed and variable costs.

Question 54

Disadvantages if break even

Answer 54

Target setting may be unrealistic and cause stresss The forecast in sales may not be achieved and therefore the break even point never reached If costs or selling price vary even slightl it will effect the break even point, Not ideal for a service as services fluctuate in price Not useful fir more than one product as It only takes into account the cost and selling price of the one item.