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level: Cash and Cash Flow [Revise]

Questions and Answers List

level questions: Cash and Cash Flow [Revise]

QuestionAnswer
Why would Cash be Important for a Business?-It simply is like Blood to a Human -If a Business has no Cash, it will Fail -Businesses need to Manage Cash Appropriately, unless it has Unlimited Finance which is Unrealistic -Cash is needed to Pay FC, Suppliers and Employees
What is the Difference between Profits and Cash?-PROFITS are just the Main Source for Funds, in a Business -Revenues will become CASH INFLOWS, and Costs will just become CASH OUTFLOWS -What this means is that Profit is changed when a Sale has just been Made, but Cash is Changed when it has Received. So a Business with Credit will be making a Profit, but having no Cash -Profit can only be affected by Running Costs, but Cash is affected by Start Up, Running and Expansion Costs. If a Business buys an Asset, then only Cash is Affected
What will happen to Cash and Profit if: 1. Customer buys Good for $10 on 20 Days Credit 2. Advertising Campaign costing around $15,000 from the Agency 3. New Machines bought for $30,000 4. Depreciation [Value of Asset Falls] charge of $100,000 to just Visualise the Use of the Fixed Asset1. Profit: Those Sales will be seen Immediacy; Cash INFLOW of $10 will be seen when the Customer has Paid 2. Profit: Those Expenses will be seen Immediately in the Cost Section; Cash OUTFLOW when its time to Pay 3. Profit: Nothing Happens, the $30,000 goes into the Value of the Fixed Assets; Cash OUTFLOW will be present as your Buying the Machine 4. Profit: Will seen the Depreciation of $100,000 as a Cost; Cash will remain Unchanged as its not LEAVING or ENTERING
What exactly is Cash flow?-This is simply the Movement of Cash that either flows IN the Business - Cash Inflow - or flows OUT the Business - Cash Outflow
What exactly is Net cash flow?-Simply the Difference between Cash Inflows and Cash Outflows over a Period of Time
Name some Examples of Cash INFLOW?-Cash Sales -Receipts from Traders -Selling Spare Assets -Owners Capital Investment -Receipt of Bank Loan -Government Grants
Name some Examples of Cash OUTFLOW?-Payment to Wages, Overheads and Salaries -Payment to Suppliers etc... -Purchasing Equipment -Interest on the Bank Loan -Dividends -Repayment of Loans -Income Tax, VAT and Corporation Tax
What is a Cash Flow Forecast?-This simply is just a Table that shows PREDICTED: -Opening Balance [What you start with] -Cash INFLOWS [Injections of Money] -Cash OUTFLOWS [Costs] -Net Cash Flows [Overall Direction of Cash] -Closing Balance [What you End with]
What is the Difference between a Deficit and a Surplus?-If the Closing Balance is Negative, its a Deficit -If the Closing Balance is Positive, its a Surplus
What are the Disadvantages with Cash Flow Forecasts?-Sales can be Lower than Expected, and this can be because your Market Research had Issues, or your just too Over-Optimistic -Customers may not Pay on Time; meaning Cash won't be Received then -Cost of Production may be Higher; Cash Outflows is Higher. This can be because the Equipment is too High, or its too Inefficient -Some Costs may not even be Listed, which may be very Detrimental
How can a Overdraft be used to Solve a Cash Flow Problem? Is there any Issues with doing so?A: Very Flexible form of Finance, and is Immediate A: Interest is only paid when the Overdraft has been Used D: And said Interest may be High D: Bank can just Withdraw at any given Moment D: Starts up may find it Hard to get a Overdraft
How can Re-scheduling be used to Solve a Cash Flow Problem? Is there any Issues with doing so?A: Customers that pay Quicker will mean the Cash Inflows will be Quicker as well - you have more Cash Present A: Getting a Longer Trade Credit with your Supplier means you have Longer to Pay your Costs with them - More Time. D: Customers may just Switch because they don't Want to Pay Earlier D: Start-ups may find it Hard to get a Short Trade Credit with their Supplier D: Stock may not even be Sold, but still has to Pay for it
How can Reducing Cash Outflows be used to Solve a Cash Flow Problem? Is there any Issues with doing so?A: Reviewing the Business's Cost scan find more Efficient Options that will reduce Cash Outflows. D: Getting a Better Supplier may be very Time Consuming D: Cheaper Stock may have its Quality Reduced, which may Tarnish the Business's Reputation D: Cutting Wages will obviously Interfere with the Staff's Needs [Stakeholders - Don't need to do that ANYMORE!] and lower Motivation
How can Increasing Cash Inflows be used to Solve a Cash Flow Problem? Is there any Issues with doing so?A: More Revenue can be made if New Methods Found A: Changing the Price may change the Demand and Revenue to your Favour A: More Promotion can Increase Awareness and Demand D: Again, new Methods may just take a Long Time D: More Promotional Activities will need to make sure its Costs are Ensured - else it'll Worsen the Business
How can Finding new Sources of Finance be used to Solve a Cash Flow Problem? Is there any Issues with doing so?A: Selling Shares can be used to gain a Permanent Source of Revenue A: Bank Loans are obviously Huge Injections of Cash A: Sale of Assets will also provide More Cash, that doesn't even need to be Paid Back! D: Selling Shares may Interfere with the Control over the Business D: Bank Loans has Interest attached to it D: Selling Assets will almost Never give you a Profit against how much it was Purchased for Originally
Why would a Cash Flow Forecast be Important for a Business?-Can see when the Business will fall Short of Cash -Makes sure that the Business can Pay its Costs -Can see Problems with Customer Payments -Very Important for Financial Planning -External Stakeholders may want to See a Forecast [Business Plan]