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