Cash flow Forecasting (Edexcel IGCSE Business): Flashcards
Exam code: 4BS1
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Cash is often called the ' ' of a business, as without it a business will quickly become insolvent.
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Cash is often called the ' ' of a business, as without it a business will quickly become insolvent.
Cash is often called the 'lifeblood' of a business, as without it a business will quickly become insolvent.
What is cash used for in a business?
Covering regular operating expenses (wages, suppliers, rent) and unexpected expenses like broken equipment.
Define cash.
Cash is the most liquid current asset — notes and coins on the premises and money in the bank.
What is the difference between cash and profit?
Profit is the difference between revenue and total costs over a period; cash is the money flowing in and out of the business.
True or False?
A profitable business can never run out of cash.
False.
A profitable business can still fail without enough cash — e.g. Joules liquidated in 2022 despite a £2.6m profit.
Why might a profitable business still lack cash?
Because some customers may not have paid yet, so revenue is earned but the cash hasn't arrived.
Define cash inflows.
Cash inflows are sums of money introduced to the business, such as sales, loans or owners' capital.
Define cash outflows.
Cash outflows are sums of money leaving the business, such as payments to suppliers, wages and loan repayments.
What is the formula for net cash flow?
Net cash flow = total cash inflows − total cash outflows.
True or False?
Revenue and cash are the same thing.
False.
Revenue is earned at the point of sale, but if sold on credit, the cash may not arrive for 30 days.
Give two examples of cash inflows.
Money from sales, a loan, owners' capital, or interest from investments.
Give two examples of cash outflows.
Payments to suppliers, wages and salaries, loan repayments, and advertising.
Define a cash flow forecast.
A cash flow forecast is a prediction of anticipated cash inflows and outflows, usually over six to twelve months.
Give one use of a cash flow forecast.
It can support a loan application, help identify cash shortfalls or surpluses, and aid planning.
Give one limitation of a cash flow forecast.
It is based on estimates (actuals may differ), needs skill and time to prepare, and may miss external factors.
What is the formula for net cash flow?
Net cash flow = total cash inflows − total cash outflows.
The opening balance is the previous month's balance carried forward.
The opening balance is the previous month's closing balance carried forward.
How is the closing balance calculated?
Closing balance = opening balance + net cash flow.
True or False?
If cash outflows are greater than cash inflows, the net cash flow is negative.
True.
When outflows exceed inflows, the net cash flow is negative.
If inflows are £5,300 and outflows are £4,780, what is the net cash flow?
£5,300 − £4,780 = £520.
To find total cash outflows for a month, you all the individual outflows together.
To find total cash outflows for a month, you add all the individual outflows together.
If the opening balance is £4,000 and net cash flow is £1,500, what is the closing balance?
£4,000 + £1,500 = £5,500.
True or False?
A cash flow forecast should be included in a business plan.
True.
A business plan should include a cash flow forecast so owners and lenders can assess finances.
How does a cash flow forecast help identify cash flow problems?
It shows periods of cash shortfalls and where there is a significant excess of cash.
A cash flow problem is shown when the balance becomes negative.
A cash flow problem is shown when the closing balance becomes negative.
What might a negative net cash flow in the early months support?
An application to borrow (e.g. an overdraft or loan) to cover the shortfall.
Name three strategies to improve cash flow.
Reduce customer credit periods, extend supplier payment periods, use an overdraft, sell excess stock, use sale and leaseback, or introduce new capital.
Why might reducing customers' credit period improve cash flow?
Collecting money more quickly increases current assets — but customers may switch to competitors with better terms.
True or False?
Selling off excess stock can improve cash flow by converting it into a more liquid asset.
True.
Selling excess stock turns it into cash and reduces storage costs, though it may be sold at a low price.
How does introducing new capital improve cash flow?
It increases current assets — but may result in dilution of control if it comes from new investors.
True or False?
A business can never have too much cash.
False.
A business can hold too much cash, missing out on the benefits of investing it — an opportunity cost.
Holding large amounts of cash has a significant cost, especially when interest rates are high.
Holding large amounts of cash has a significant opportunity cost, especially when interest rates are high.
Give one drawback of using an overdraft to solve cash flow problems.
Current liabilities increase, and banks may be reluctant to lend to businesses with cash-flow problems.
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