Cash Flow (AQA GCSE Business): Flashcards
Exam code: 8132
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Define profit.
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Cards in this collection (35)
Define profit.
Profit is the difference between revenue generated and total business costs during a specific period of time.
What does a business take into account when measuring its cash?
Cash is measured by taking into account the full range of money flowing in and out of a business. This includes sales revenue, operating expenses, investments and loans.
True or False?
A business that makes a profit will always have enough cash.
False.
A profitable business may lack cash because some customers may not have paid it yet.
Which regular expenses does a business use cash to cover?
Cash covers regular operating expenses, such as workers' pay, supplier invoices and overheads like rent and utility bills.
As well as regular costs, cash can be used to meet ________ expenses, such as replacing broken equipment.
As well as regular costs, cash can be used to meet unexpected expenses, such as replacing broken equipment.
Define insolvency.
Insolvency is when a business does not have enough cash to pay its suppliers, employees and operating expenses.
True or False?
Money held in a business bank account counts as cash.
True.
Cash is a liquid asset in the form of notes, coins and money in the bank.
Why might a new business have to pay cash on purchase for all of its supplies?
Its suppliers may not yet trust the business enough to offer it buy now, pay later terms.
Define trade credit.
Trade credit is an arrangement where a supplier lets a business receive stock now and pay for it later, often after 30 or 60 days.
What is likely to happen to production if a business cannot pay its workers and suppliers?
Production is likely to stop, because workers will not work without pay and suppliers will not supply goods if they are not paid.
Serious cash-flow problems could force a business into _________, and it is then likely to fail.
Serious cash-flow problems could force a business into liquidation, and it is then likely to fail.
Define cash flow forecast.
A cash flow forecast is a prediction of a business's expected cash inflows and outflows, usually over a six to twelve month period.
Which items count as inflows on a cash flow forecast?
Inflows include income from sales, loans received from the bank, interest received and capital put in by the owners.
True or False?
Paying staff wages is an example of a cash inflow.
False.
Wages are a cash outflow. Other outflows include payments for stock, rent, utility bills and loan repayments.
A cash flow forecast allows owners or managers to make plans to cover cash ________.
A cash flow forecast allows owners or managers to make plans to cover cash shortfalls.
How can a cash flow forecast help an existing business?
It can show where a fall in sales may require the business to use an overdraft facility.
How does a cash flow forecast support an application to borrow money?
It shows the size of loan or overdraft needed, when and for how long it is needed and by when it is likely to be repaid.
Define opening balance.
The opening balance is the cash position at the beginning of each month.
What usually makes up the opening balance in the first month of a forecast?
It is usually cash carried forward from earlier trading, or cash introduced by the owner or from loans received.
Define net cash flow.
Net cash flow is the difference between cash inflows and cash outflows during a month.
Net cash flow = Cash inflows − Cash outflows
How is the closing balance calculated?
The closing balance is calculated using this formula:
Closing balance = Net cash flow + Opening balance
True or False?
In later months, the opening balance is the previous month's closing balance carried forward.
True.
Each month's closing balance is carried forward to become the next month's opening balance.
What must a business do first when constructing a cash flow forecast?
It must gather information about all the cash inflows and outflows it expects over the period.
True or False?
Net cash flow is negative when cash outflows are greater than cash inflows.
True.
Net cash flow is inflows minus outflows, so it is negative whenever outflows are larger.
In March, a business has cash inflows of €10,500 and cash outflows of €10,760. What is its net cash flow?
The net cash flow is €10,500 − €10,760 = €(260). The brackets show that it is a negative figure.
The opening balance is the previous month's closing balance _____________.
The opening balance is the previous month's closing balance carried forward.
A business has an opening balance of €(260) and a net cash flow of €240 for April. What is its closing balance?
The closing balance is €(260) + €240 = €(20).
True or False?
A business with a positive net cash flow in a month must also have a positive closing balance.
False.
The closing balance also depends on the opening balance. A negative opening balance can leave a negative closing balance even when net cash flow is positive.
What does a negative closing balance on a cash flow forecast show?
It shows that the business has a cash flow problem in that month.
Which solution may be most suitable for a short-term cash flow problem?
The most suitable method may be to arrange a flexible, short-term overdraft facility with the bank.
How does reducing the credit period offered to customers help a business's cash flow?
Money owed by customers is collected more quickly, which increases current assets. However, customers may move to competitors offering better credit terms.
True or False?
Asking suppliers for longer to pay reduces a business's current liabilities.
False.
Current liabilities will not be reduced, but the business can use the cash it would have paid suppliers for other purposes.
What is one drawback of selling off excess stock to raise cash?
The stock may need to be sold at a low price to attract sales.
Selling a fixed asset and then renting it back so the business can keep using it is called a ________________.
Selling a fixed asset and then renting it back so the business can keep using it is called a sale and leaseback.
What is a possible drawback of bringing in new capital from additional investors?
It may result in a dilution of control over the business.
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