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Questions and Answers
What is the main difference between cash and profit?
What is the main difference between cash and profit?
Negative cash flow indicates a healthy financial situation for a business.
Negative cash flow indicates a healthy financial situation for a business.
False
What is net cash flow?
What is net cash flow?
The difference between total cash inflows and total cash outflows.
A cash flow forecast typically covers a period of _____ months.
A cash flow forecast typically covers a period of _____ months.
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Match the types of cash flows with their definitions:
Match the types of cash flows with their definitions:
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Which of the following is NOT an example of cash inflow?
Which of the following is NOT an example of cash inflow?
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The opening balance refers to the amount remaining at the end of a financial period.
The opening balance refers to the amount remaining at the end of a financial period.
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What is the purpose of a cash flow forecast?
What is the purpose of a cash flow forecast?
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Study Notes
Importance of Cash
- Cash is essential for businesses to pay suppliers, employees, rent, and other operational costs.
- Insufficient cash can lead to business failure (insolvency), impacting debt repayment.
- Cash is foundational for investment, expansion, and handling unexpected issues.
Cash vs. Profit
- Cash represents readily available funds for a business.
- Profit is the remaining amount after expenses are deducted.
- Cash availability differs from post-expense earnings.
Cash Flow
- Cash flow tracks money movement into and out of a business.
- Positive cash flow signifies healthy operations (inflows exceed outflows).
- Negative cash flow potentially indicates financial trouble (outflows exceed inflows).
Cash Inflows
- Customer payments are a primary cash inflow.
- Bank loans are a source of cash.
- Bank interest received increases available cash.
- Sales of fixed assets contribute to cash inflow.
- Supplier refunds add to positive cash flow.
- Business owner loans enhance cash resources.
- Grants and funding proceeds boost available capital.
Cash Outflows
- Supplier payments are a significant cash outflow.
- Bank loan repayments reduce cash reserves.
- Bank charges decrease available funds.
- Purchasing fixed assets reduces cash.
- Dividends paid decrease available capital.
- Salaries and wages are substantial cash outflows.
- Car payments are a regular cash outflow.
- Insurance premiums are a recurring cash outflow.
- Tax payments reduce available cash.
Net Cash Flow
- Net cash flow is the difference between total inflows and outflows.
- Formula: Cash receipts minus cash payments.
- Net cash flow types:
- Operating activities: Daily business cash flows.
- Financing activities: Cash from or used for debt.
- Investing activities: Cash from or used for investments.
Opening and Closing Balances
- Opening balance is the initial amount at a period's start.
- Closing balance reflects the amount at a period's end.
Cash Flow Forecast
- A cash flow forecast predicts future cash inflows and outflows.
- Typically covers a 12-month period; shorter intervals are suitable for smaller businesses.
- Forecasts should be regularly updated with the changing circumstances.
Purpose of Cash Flow Forecast
- Assists in planning and identifies potential cash shortfalls.
- Aids in managing significant expenditures.
- Helps with sales planning and pinpoints areas of excessive spending.
- Improves understanding of a business's cash flow patterns.
Example of Cash Flow Forecast
- A six-month forecast demonstrates opening/closing balances, inflows, outflows, and net cash flow per month.
- The prior period's closing balance becomes the subsequent period's opening balance.
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Description
This quiz explores the critical role of cash in business operations, distinguishing between cash and profit, and understanding cash flow dynamics. Learn how cash inflows support business sustainability and growth. Test your knowledge on essential financial concepts that impact business success.
