Cash flow

Question 1

Define CASH FLOW

Answer 1

Cash flow is the amount of money flowing into and out of the business.

Question 2

Define NET CASH FLOW

Answer 2

Net cash flow is cash inflows - cash outflows over a period of time

Question 3

What are examples of cash inflows?

Answer 3

• Revenue
• Loans
• Grants
• Interest on savings
• Receipts from trade debtors
• Share capital
• Sale of fixed assets

Question 4

What are examples of cash outflows?

Answer 4

• Payments to suppliers
• Wages and salaries
• Interest on bank loans
• Payment for fixed assets
• Dividends paid to shareholders
• Repayment of loans

Question 5

Define INSOLVENT

Answer 5

Insolvency is when a business runs out of cash and is unable to pay what it owes. The business must either resrtucture payments with the relevant parties or shut the business down altogether.

Question 6

Define LIQUIDATION

Answer 6

Liquidation is when the business closes and converts assets ino cash so that the amount the business owes can be paid off.

Question 7

What are examples of problems caused by bad cash flow?

Answer 7

• Businesess dont have enough cash to function on a day to day basis (buying stock, paying wages, paying bills)
• Inability to meet short term debts (bank overdrafts and trade creditors)
• Missed opportunities
• Long term cash flow issues can be insurmountable.

Question 8

Define a CASH FLOW FORECAST

Answer 8

A cash flow forecast is a prediction or plan of the in and outflows of cash in a business. Normally produced by month. Includes all cash flows and the opening and closing balances.

Question 9

How is closing balance calculated?

Answer 9

Closing balance = opening balance + net cash flow

Question 10

How is opening balance calculated?

Answer 10

Opening balance = closing balance of the previous month

Question 11

Why should a business produce a cash flow forecast?

Answer 11

• Shows advanaced warnings of cash shortages
• Makes sure the business can afford to pay suppliers and employees
• Spots problems with customer payments
• Enables financial control
• Provides reassurance to investers and lenders that the business is being managed properly.

Question 12

What is difference between cash and profit?

Answer 12

• Profit exists when total revenue is greater than costs
• Cash is the physical existance of money within a business
• Profitable businesses can still fail due to cash flow problems.

Question 13

Why might a profitable business be short of cash?

Answer 13

• The firm has high stock levels and so most of their wealth exists in stock rather than cash.
• The firm has given credit to customers and so is wealth is with its debtors.
• The firm has used its profits to pay dividends to shareholders or re-pay long term loans
• The firm has purchased fixed assets such as new machinery.