Forecasting & Managing Cash Flows (Cambridge (CIE) A Level Business): Flashcards
Exam code: 9609
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Define cash flow forecast.
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Define cash flow forecast.
A cash flow forecast is a prediction of a business's anticipated cash inflows and outflows, usually over a six- to twelve-month period.
Why do lenders and investors want to see a cash flow forecast?
It provides evidence that finance is required and shows how much is needed, when it is needed and when it is likely to be repaid.
True or False?
Repayments of a bank loan are a cash inflow.
False.
Loan sums received from a bank are a cash inflow, but loan repayments are a cash outflow.
Define net cash flow.
Net cash flow is the difference between cash inflows and cash outflows during a period.
Net cash flow = Cash inflows − Cash outflows
How is the closing balance in a cash flow forecast calculated?
The closing balance is calculated using this formula:
Closing balance = Net cash flow + Opening balance
In later months, the opening balance is the previous month's closing balance _____________.
In later months, the opening balance is the previous month's closing balance carried forward.
A business has an opening balance of €0 and a net cash flow of €(260) in March. In April its net cash flow is €240. What is the closing balance for April?
The closing balance for April is €(20), because March's closing balance of €(260) becomes April's opening balance and €240 is added to it.
What happens to later months when a cash flow forecast is amended?
The change alters that month's net cash flow and closing balance, so the opening and closing balances of every later month change too.
Why can holding too much cash be a problem for a business?
The business is missing out on investing in fixed assets or investments, which is a significant opportunity cost, especially when interest rates are high.
True or False?
Using an overdraft to improve cash flow increases a business's current liabilities.
True.
An overdraft lets the business spend more than it has in its bank account, and the amount owed adds to its current liabilities.
What is the main drawback of reducing the credit period offered to customers?
Customers may move to competing businesses that offer better credit terms.
True or False?
Asking suppliers for a longer credit period reduces a business's current liabilities.
False.
Current liabilities are not reduced, but the business can use the cash it would have paid to suppliers for other purposes.
Selling off excess _______ converts less liquid current assets into cash and may reduce storage and security costs.
Selling off excess inventory converts less liquid current assets into cash and may reduce storage and security costs.
What is a drawback of bringing in new capital from additional investors to improve cash flow?
It may lead to a dilution of control of the business.
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