Section C

What is cash flow?

Cash flowing into the business

How do you calculate net cash flow?

Total inflows - Total outflows

What is opening balance?

Amount of cash predicted to be in the business at the start of the month

What is closing balance?

Amount of cash predicted in the business at the end of the month

What is a cash flow forecast?

A prediction of how much cash will flow into the business and out of the business each month

Why do cash flow forecasts exist?

To make sure businesses don't run out of cash in the future, because if the entrepreneur running the business sees that the business is about to lose cash, they can take action to avoid the problem.

Banks also see cash flow forecasts before giving money to see if the business has enough cash each month to be able to make loan repayments

What is break even analysis?

A method to work out when a business will generate enough sales revenue to cover all costs of sales and expenses

What happens when a business breaks even

They have made no profit or loss
Money incoming through sales is the same as money going out in costs

What is the break even formula?

Fixed costs / (selling price - variable costs)

What is included in a break even chart?

Revenue (starts at zero)
Total costs(starts at the line of fixed costs)
Fixed costs

What is margin safety?

Amount of products above the break even point that a business is actually producing

How do you calculate margin safety?

Current output - break even level of output

What are solutions to cash flow problems?

Chasing debtors

Selling off inventory

Increasing revenue

Selling off unused assets

What are the sources of finance?

owner funds
retained profits
loans
credit cards
government grants
hire purchase and leasing
trade credit
venture capital
peer-to-peer lending

What are owner funds?

How much the entrepreneur has invested in the business

What are the pros and cons of owner funds?

Do not have to repay
No interest charges
Risking own savings can be motivational
Do not have to go through any lengthy application procedures

May only be limited amounts of money

Threat to personal finances and family

What is retained profit?

Profit kept within a business from profit from previous years to help finance future activities

What are the advantages of retained profit?

Avoids interest payments
Does not dilute the business ownership
Internal, therefore no need to repay
Instantly available
Does not incur additional costs such as interest payments

What are the disadvantages of retained profit?

Only an option if sufficient retained profit exists within the business

May cause dissatisfaction if this is at the expense of dividend payments to the owners of the business

Reduces the security blanket of keeping retained profits for unforeseen situations

What are loans?

A set amount of money provided for a specific purpose, to be repaid with interest over a set period of time

What are advantages of loans?

Quick and easy to secure
Fixed interest rates allow firms to budget
Improved cash flow
The borrower retains ownership of the company

What are disadvantages of loans?

Interest must be paid regardless of financial performance
A firm that is highly geared i.e. has a high proportion of capital raised through debt, may be seen as high risk
A firm normally provides security known as collateral
Often more expensive than other firms if finance
Can be charged a penalty for early payments

What are credit cards?

Allow a business to receive goods or services now and pay for them at a later date

What are pros and cons of credit cards?

Payment can be spread out over a long period of time
This could be used to fund short term cash flow problems
A new entrepreneur may use a credit card to buy stock

Can be expensive as interest is charged in the balance outstanding on the card

What are government grants?

The government can provide grants to businesses for specific purposes

What are pros if government grants?

Can encourage a business to:

Provide employment or training

Become more environmentally friendly

Do not need to be repaid

What are cons of government grants?

May be difficult to attract grants
May be tied to certain conditions eg locate in an area of high unemployment

What is hire purchase?

Spreading the cost of an asset over a period of time

What are advantages and disadvantages of hire purchase?

Immediate use of the asset
Supplier is responsible for maintenance
Can easily upgrade to newer models

Costs more in the long run

Interest charges can be high

There may be a deposit payment

What is Leasing?

Paying to use an asset without ever owning it

What are advantages and disadvantages of leasing?

Can upgrade to newer models easily

Helps resolve short term cash flow issues.

Costs more in the long run

Is an ongoing expense rather than an asset

What is trade credit?

Paying suppliers a period of time after the goods or services have been received

What is venture capital?

Investment from an established business into another business in return for a percentage equity in the business

What is peer to peer lending?

Investment from an individual into another business in return for a percentage equity in the business

What are the advantages of both venture capital and peer to peer lending?

Potential large sum of money for investment
Expertise to help the business
Makes it easier to attract other sources of finance
Provides the required capital for expansion

What are the disadvantages of both venture capital and peer to peer lending?

A long and complex process
Expert financial projections are likely to be required
Initially expensive for the firm
Partial loss of ownership
Risk of conflict or perceived interference