Cash Flow (AQA A Level Business): Flashcards
Exam code: 7132
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Define cash flow forecast.
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Define cash flow forecast.
A cash flow forecast is a financial document that predicts the amount of cash expected to flow into and out of a business over a future period, typically month by month.
How does a cash flow forecast help a business deal with future cash shortfalls?
It highlights months where outflows are expected to exceed inflows. This allows the business to arrange finance, such as an overdraft, in advance.
Why do banks and investors ask to see a cash flow forecast?
It forms part of the business plan and shows that the owner has a realistic understanding of the business's financial needs.
By comparing forecast figures with ____ cash flows each month, managers can identify where performance differs from the plan and take corrective action early.
By comparing forecast figures with actual cash flows each month, managers can identify where performance differs from the plan and take corrective action early.
True or False?
Because cash flow forecasts are based on estimates, real inflows and outflows may differ significantly from them.
True.
Forecasts are based on estimates, and external factors may not be reflected in them, so real inflows and outflows may differ significantly.
Define net cash flow.
Net cash flow is total cash inflows minus total cash outflows in a specific period of time.
Net cash flow = Total cash inflows − Total cash outflows
In June, a business forecasts total cash inflows of £14,200 and total cash outflows of £14,240. What is its net cash flow?
The net cash flow is £(40). It is negative because cash outflows are greater than cash inflows.
Define opening balance.
The opening balance is the previous month's closing balance carried forward.
How is the closing balance in a cash flow forecast calculated?
The closing balance is calculated by adding the net cash flow to the opening balance.
True or False?
A negative net cash flow in a single month always shows that the business model is failing.
False.
A temporary problem, such as a large payment in one month, is very different from outflows consistently exceeding inflows over several months, which is a more serious concern.
What should a thorough analysis of a cash flow forecast identify about the cash position?
It should identify where, when and why the cash position becomes problematic.
How could a business respond to a cash flow problem caused by late customer payments?
It could tighten credit terms, send reminders or offer early payment discounts.
How could a business manage a cash flow problem caused by one large outflow?
It could pay in instalments or lease assets rather than buying them outright.
Why can holding too much cash be a problem for a business?
The business may miss out on the benefits of investing the cash in fixed assets or savings. This represents a significant opportunity cost, especially when interest rates are high.
Define debt factoring.
Debt factoring involves selling a business's outstanding invoices to a specialist finance company known as a factor, in exchange for an immediate cash advance.
Apart from providing cash, what are two advantages of debt factoring?
It removes the time and administrative cost of chasing outstanding invoices. It also converts unpredictable cash inflows into a more reliable, predictable pattern.
What are two disadvantages of debt factoring?
The business receives less than the full invoice value because of the factor's fee. Customers may also react negatively to being contacted by a collections company.
True or False?
Shortening customer payment periods reduces the risk of bad debts.
True.
The longer a customer takes to pay, the greater the chance the invoice is never settled, so shorter payment periods reduce the risk of bad debts.
Why might shorter payment terms lead to lost sales?
Business customers often rely on credit terms to manage their own cash flow. They may take their orders to competitors offering more generous credit.
Define early payment incentives.
Early payment incentives involve offering customers a small discount, typically 1–3% of the invoice value, if they pay before the due date.
Why might an early payment discount cost a business unnecessarily?
Customers who would have paid promptly anyway may claim the discount. The business then pays for an incentive it did not need to offer.
Define credit checks.
Credit checks involve assessing the financial reliability of a customer before agreeing to offer them trade credit.
How can the results of a credit check shape the terms a business offers?
The business can offer shorter payment terms or require a deposit from higher-risk customers, rather than applying the same terms to everyone.
A clean credit history does not _______ future payment, so some bad debt risk always remains.
A clean credit history does not guarantee future payment, so some bad debt risk always remains.
True or False?
Increasing supplier payment periods reduces a business's revenue.
False.
Longer supplier payment periods improve the short-term cash position without reducing revenue or incurring interest charges.
Why might suppliers refuse to accept longer payment periods?
Smaller suppliers may rely on prompt payment for their own cash flow. Suppliers are also less likely to agree where the business lacks significant bargaining power.
Why can reducing outgoings be difficult in the short term?
Many costs, such as rent and loan repayments, are fixed in the short term. They cannot be reduced without financial penalty or lengthy renegotiation.
Why do many businesses lose cash flow even when customers are willing to pay?
Invoices are often sent late, contain errors or are never chased up when the payment deadline passes. Better invoice management can fix this at no additional cost.
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