Level 3 Applied Business AO2 2d Cash Flow Forecasting

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What is cash flow?
Cash flow is the money that enters and leaves a business as it makes and receives payments.
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What is a cash flow forecast?
Detailed estimates of when and how cash is expected to flow in and out of a business.
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What is the difference between cash flow and profits?
Business makes profit if it's income is greater than costs, can survive without making profit for short period. Cash flow relates to timing of payment and reciepts, important in the short term as business must pay people and organisations it owes mon
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What is the purpose of a cash flow forecast?
Monitoring cash flow helps a business maintain its position so that sufficient funds are available to finance it's day-to-day operations. More UK business fail due to poor cash flow than for any other reason.
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Why is preparing a cash flow forecast a form of proactive management?
Delay between money going out and money coming into the business bank can cause problems. So rather than waiting for issues to arise & THEN trying to solve them, manager can anticipate these problems & plan ways to maintain a good cash flow position.
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How do banks assist their business account holders to create cash flow forecasts?
Produce a range of information and material, e.g. some provide templates that allow firms to compile cash flow forecasts online.
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Why do many financial institutions demand evidence that entrepreneurs have planned the management of cash for a new enterprise before graning a loan?
Because business are especially vunerable to cash flow difficulties in their first months and years of trading.
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Why are new business especially vunerable to cash flow problems?
•Give customers time to pay to win from established firms (delays receipt of cash). Heavy cash outflows because: •Suppliers may demand immediate payment •Spend heavily on marketing •Do not have built up cash reserves from previous trading periods.
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What are the positive benefits of creating a cash flow forecast?
•Can identify periods of cash surplus so high-cost items can be purchased •Can limit your borrowing and minimise interest payments, because they only need to borrow the amount they need •Highlight cash surpluses that can be invested elsewhere
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What are the negative benefits of creating a cash flow forecast?
•Can identify periods of cash shortfall so remedial action like overdrafts can be arranged •Highlights if large expenditure is not possible, so business will have to spread payments for fixed assets over monthly installments
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Why would potential funders want to see a cash flow forecast?
To demonstrate funds are available to meet interest and capital reypayments on loans.
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What is the difference between cash and credit payments?
Goods sold on cash terms generate income that the business can use immediately. With credit sales customers are given a set amount of time to pay for the goods or services after purchases. Typical credit periods range from 30 day to longer term deals
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What are cash flow forecasts constructed with? And what are the three secions?
Constructed using historical infromation and the forecasts contained in the budgets. Sections: •Cash inflows •Cash outflows •The running balance.
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What are cash inflows?
Money recieved by a business. Main source is sales revenue. Also includes loans, grants and capital.
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What are cash outflows?
Money paid out by the business and leaving it's bank account. Arise thru payments for: •Purchases •Wages and Salaries •Bills •Rent and rates •Loan interest •Capital expenditure •Tax
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Net cash flow
Total Cash Inflow - Total Cash Outflow = Net Cash Flow
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Closing bank balance
Opening bank balance + Net Cash Flow = Closing bank balance
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Opening and Closing Bank Balances
The opening balance is the business' cash position at the start of each month. This will be the same figure as at the end of the previous month. Closing balance for the month is the opening balance for the following month.
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What is the running balance?
A calculation of the net effect of the cash inflows and outflows on the businesses bank balance on a monthly basis. It shows how much money the business thinks it will have (or won't have) at the end of each month.
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Other cards in this set

Card 2

Front

What is a cash flow forecast?

Back

Detailed estimates of when and how cash is expected to flow in and out of a business.

Card 3

Front

What is the difference between cash flow and profits?

Back

Preview of the front of card 3

Card 4

Front

What is the purpose of a cash flow forecast?

Back

Preview of the front of card 4

Card 5

Front

Why is preparing a cash flow forecast a form of proactive management?

Back

Preview of the front of card 5
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