TOPIC 3.2: Cash Flow Forecasting

What is cash flow?

• A) The profit a business makes

• B) The money coming into and going out of a business

• C) The total value of assets a business owns

• D) The amount of tax a business pays

• E) The total sales revenue of a business

B - The money coming into and going out of a business

Which of the following is a cash inflow?

• A) Paying suppliers

• B) Paying employee wages

• C) Sales revenue from customers

• D) Paying rent

• E) Buying new machinery

C - Sales revenue from customers

Which of the following is a cash outflow?

• A) Receiving a bank loan

• B) Sales revenue

• C) Paying suppliers for raw materials

• D) Receiving investment from shareholders

• E) Selling an asset

C - Paying suppliers for raw materials

The formula for net cash flow is:

• A) Total Inflows × Total Outflows

• B) Total Inflows ÷ Total Outflows

• C) Total Inflows - Total Outflows

• D) Total Inflows + Total Outflows

• E) Total Outflows - Total Inflows

C - Total Inflows - Total Outflows

The closing balance is calculated as:

• A) Opening Balance - Net Cash Flow

• B) Opening Balance + Net Cash Flow

• C) Opening Balance × Net Cash Flow

• D) Opening Balance ÷ Net Cash Flow

• E) Net Cash Flow - Opening Balance

B - Opening Balance + Net Cash Flow

A negative net cash flow means:

• A) More money is coming in than going out

• B) More money is going out than coming in

• C) The business is making a profit

• D) The business has no expenses

• E) The business is growing rapidly

B - More money is going out than coming in

What is the difference between cash and profit?

• A) Cash is always higher than profit

• B) Cash is money available now; profit is the surplus after costs

• C) Profit is money available now; cash is the surplus after costs

• D) There is no difference

• E) Profit is only for large businesses

A: B - Cash is money available now; profit is the surplus after costs

A cash-flow forecast helps a business to:

• A) Calculate its profit

• B) Predict future cash inflows and outflows

• C) Measure employee performance

• D) Calculate tax owed

• E) Set prices for products

B - Predict future cash inflows and outflows

Money coming into a business is called ____________________ ____________________.

Cash inflows

Money going out of a business is called ____________________ ____________________.

Cash outflows

The difference between total cash inflows and total cash outflows is called ____________________ ____________________ ____________________.

Net cash flow

The amount of cash at the start of a period is called the ____________________ ____________________.

Opening balance

The amount of cash at the end of a period is called the ____________________ ____________________.

Closing balance

When a business is unable to pay its debts, it is called ____________________.

Insolvency

The document that predicts future cash inflows and outflows is called a ____________________ ____________________ ____________________.

Cash-flow forecast

Why is cash important to a business?

• To pay suppliers, overheads and employees

• To prevent business failure (insolvency)

• To take advantage of opportunities

• A business can be profitable but fail if it runs out of cash

What are the uses of a cash-flow forecast?

• Identify potential cash shortages

• Plan for loan repayments

• Help with budgeting

• Support applications for external finance

• Monitor business performance