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IBBusinessDPBusiness ManagementHLFlashcards3. Finance & Accounts3.7 Cash Flow

3.7 Cash Flow (DP IB Business Management)

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  • What is the difference between profit and cash flow?

    Profit is calculated at a specific point in time, while cash flow measures money flowing in and out of a business over a period of time.

  • True or False?

    A profitable business cannot fail.

    False.

    A profitable business can still fail if it does not have sufficient cash to meet its immediate financial obligations.

  • What is meant by the term working capital?

    Working capital is the money that a business has available to fund its day-to-day activities.

  • State the formula used to calculate working capital.

    Formula.

    Working space capital space equals space Current space assets space minus space Current space liabilities

  • Which is the most liquid of a business's current assets?

    Cash is the most liquid of a business's current assets.

  • True or False?

    There's no such thing as too much working capital.

    False.

    Having too much working capital can represent an opportunity cost, especially when interest rates are high.

  • What is meant by the term liquidity?

    Liquidity is the ability of a business to meet its short-term commitments with its available assets.

  • Which financial statement contains information about a business's liquidity?

    The statement of financial position contains information about a business's liquidity.

  • True or False?

    Working capital and cash are the same thing.

    False.

    Working capital includes cash but also includes less liquid current assets like debtors and stock.

  • Give two ways a business could increase its level of working capital.

    The level of working capital can be increased by:

    • Converting debtors and stock into cash as quickly as possible

    • Requesting an extension of payment terms from suppliers

    • Making use of short-term borrowing options, such as overdrafts

  • Define the term current assets.

    Current assets are assets that can be converted into cash within one year or less.

  • Define the term current liabilities.

    Current liabilities are debts or obligations that are due within one year or less.

  • True or False?

    A business with positive working capital will have enough cash to pay its bills.

    False.

    A business may have positive working capital but still fail to meet immediate financial commitments if its current assets are not liquid enough.

  • What is a cash flow forecast?

    A cash flow forecast is a prediction of the anticipated cash inflows and outflows, usually for a six- to twelve-month period.

  • How is net cash flow calculated?

    Net cash flow is calculated by subtracting total cash outflows from total cash inflows.

  • In a cash flow forecast, what is the opening balance?

    In a cash flow forecast, the opening balance is the previous month's closing balance carried forward.

  • How is the closing balance calculated?

    The closing balance is calculated by adding the net cash flow to the opening balance.

  • True or False?

    Cash flow forecasts are always 100% accurate.

    False.

    Cash flow forecasts are based on estimates, and in reality, inflows and outflows may differ significantly from the estimates.

  • Give one advantage of using cash flow forecasts.

    Advantages of using cash flow forecasts include:

    • They can support an application for a loan as an integral part of the business plan

    • They can identify where a business may experience cash shortfalls or cash surpluses, allowing plans to be made to manage these periods

    • They can aid planning and support decision making

  • True or False?

    External factors that can impact cash inflows and outflows may not be reflected in the cash flow forecast.

    True.

    External factors that can impact cash inflows and outflows may not be reflected in the cash flow forecast.

  • Why is a cash flow forecast usually included in a business plan?

    A cash flow forecast is usually included in a business plan as it allows business owners, lenders and investors to identify its financial needs.

  • Why might new entrepreneurs find it difficult to create accurate cash flow forecasts?

    New entrepreneurs often find it difficult to create accurate forecasts as they have little experience to draw on.

  • True or false?

    Cash flow forecasts are only useful for large businesses.

    False.

    Cash flow forecasts are useful for businesses of all sizes, including start-ups and small businesses.

  • True or False?

    Start-ups typically have a positive cash flow.

    False.

    Start-ups often have negative cash flow.

  • What is the best way to improve cash flow?

    The best way to improve cash flow is to manage the business better.

  • True or False?

    Asking suppliers for extended repayment periods can improve cash flow.

    True.

    Asking suppliers for an extended repayment period can improve cash flow.

  • What is zero budgeting?

    Zero budgeting is a method of budgeting in which all expenses must be justified for each new period.

  • True or False?

    Having too much cash is always good for a business.

    False.

    If a business is holding large amounts of cash, it may be missing out on investment opportunities.

  • Give one potential drawback of reducing credit periods for customers?

    One drawback is that customers may move to competing businesses that offer better credit terms.

  • True or False?

    Businesses with cash flow problems can usually access overdraft facilities with ease.

    False.

    Banks may be reluctant to lend to businesses with cash-flow problems.

  • What is sale and leaseback?

    Sale and leaseback is where a business sells an asset and leases it back for the long term.

  • True or False?

    Selling off excess stock always improves cash flow.

    True.

    Selling off excess stock causes cash to flow into the business.

  • True or False?

    New capital may be introduced by the owner or from additional investors to ease cash flow problems.

    True.

    New capital may be introduced by the owner or from additional investors to ease cash flow problems.

Previous:3.6 Efficiency Ratio AnalysisNext:3.8 Investment Appraisal

    1. Topic 1

      1.1 What is a Business?

    2. Topic 2

      1.2 Types of Business Entities

    3. Topic 3

      1.3 Business Objectives

    4. Topic 4

      1.4 Stakeholders

    5. Topic 5

      1.5 Growth & Evolution

    6. Topic 6

      1.6 Multinational Companies (MNCs)

    1. Topic 1

      2.1 Introduction to Human Resource Management

    2. Topic 2

      2.2 Organisational Structure

    3. Topic 3

      2.3 Leadership & Management

    4. Topic 4

      2.4 Motivation & Demotivation

    5. Topic 5

      2.5 Organisational (Corporate) Culture

    6. Topic 6

      2.6 Communication

    7. Topic 7

      2.7 Industrial Relations

    1. Topic 1

      3.1 Introduction to Finance

    2. Topic 2

      3.2 Sources of Finance

    3. Topic 3

      3.3 Costs & Revenues

    4. Topic 4

      3.4 Final Accounts

    5. Topic 5

      3.5 Profitability & Liquidity Ratio Analysis

    6. Topic 6

      3.6 Efficiency Ratio Analysis

    7. Topic 7

      3.7 Cash Flow

    8. Topic 8

      3.8 Investment Appraisal

    9. Topic 9

      3.9 Budgets

    1. Topic 1

      4.1 Introduction to Marketing

    2. Topic 2

      4.2 Marketing Planning

    3. Topic 3

      4.3 Sales Forecasting

    4. Topic 4

      4.4 Market Research

    5. Topic 5

      4.5 The Marketing Mix (7 P's)

    6. Topic 6

      4.6 International Marketing

    1. Topic 1

      5.1 Introduction to Operations Management

    2. Topic 2

      5.2 Operations Methods

    3. Topic 3

      5.3 Lean Production & Quality Management

    4. Topic 4

      5.4 Location

    5. Topic 5

      5.5 Break-Even Analysis

    6. Topic 6

      5.6 Production Planning

    7. Topic 7

      5.7 Crisis Management & Contingency Planning

    8. Topic 8

      5.8 Research & Development (R&D)

    9. Topic 9

      5.9 Management Information Systems

    1. Topic 1

      6.1 The Business Management Toolkit