Cash flow, profit and business finance

What is cash flow?

The movement of money into and out of a business over time

Which transaction is a cash inflow for a business?

Receiving payment from a customer

How is profit calculated?

Total revenue minus total costs

Why can a profitable business still experience cash-flow problems?

Customers may buy on credit and pay later

What is a cash-flow forecast?

An estimate of future cash inflows, outflows and balances

A business has an opening cash balance of £4,000, inflows of £9,000 and outflows of £11,000. What is its closing cash balance?

£2,000

What is the main purpose of preparing a cash-flow forecast?

To identify possible cash shortages in advance

What is working capital?

Current assets minus current liabilities

Which action is most likely to improve cash flow in the short term?

Collecting customer debts more quickly

What is retained profit?

Profit kept in the business rather than paid to owners or shareholders

Which source of finance is usually most suitable for covering a temporary cash shortage in a bank account?

A bank overdraft

What is trade credit?

Permission from a supplier to pay for goods or services at a later date

Which source of finance requires the business to make repayments and usually pay interest?

A bank loan

What is a key advantage of using retained profit as a source of finance?

It does not require interest payments to a lender

Which source of finance is generally most appropriate for purchasing an expensive building used over many years?

A long-term loan or mortgage

What is one consequence of persistent negative cash flow?

The business may be unable to pay bills when they are due

How does depreciation affect profit and cash flow in the period when it is recorded?

It reduces profit but is not itself a cash outflow

Which statement best distinguishes share capital from loan finance?

Shareholders provide ownership finance, while lenders provide debt finance