Which of the following is an example of a cash inflow for a business?
Bank loan repayment
Raw materials costs
Rent received
Wages
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Which of the following is an example of a cash inflow for a business?
Bank loan repayment
Raw materials costs
Rent received
Wages
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Which of the following describes profit?
The full range of money flowing in and out of a business during a specific period of time
The point at which total costs are equal to total revenue
Where total costs exceed all of the revenue streams of a business
The difference between revenue generated and total business costs during a specific period of time
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State one use of cash in a business.
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Which of the following is a description of liquidation?
Where the owner of a business is held personally responsible for debts incurred
The legal process of dissolving a company
Making a loss as a result of poor sales
Selling shares for the first time on the stock exchange
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State two common elements of a cash flow forecast
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State the formula used to calculate the closing balance in a cash flow forecast.
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State one way a business could solve a short-term cash flow problem.
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Sonya has been running Bambino Parties for two years. Last year, she made a profit of £8,000 and now wants to increase the number of parties by 20%.
A friend recently started to work for Sonya on a part time basis. She designs backgrounds for parties and these have proved very popular. Her friend has asked if she can become a partner in Bambino Parties. She is willing to invest £3,000 into the business in return for 50% of the profits and will work full time to help expand the business.
When Sonya takes a booking for a party, she asks for a 10% deposit and then receives the rest of the agreed price after the party. Her suppliers, people who provide venues, catering, and birthday cakes, expect to be paid in advance. She is worried about the effect this will have on cash flow.
Sonya has produced a cash flow forecast.
Figure 2
June | July | August | September | |
Total Income | 5,000 | 11,100 | 9,200 | 11,600 |
Total Expenses | 8,100 | 7,100 | 9,800 | 7,900 |
Balance brought forward | (1,300) | (4,400) | (400) | (1,000) |
Balance carried forward | (4,400) | (400) | (1,000) | 2,700 |
Explain one way Sonya could improve her cash flow problems.
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Ellie Swift is the owner of Swiftly Services. She always dreamed of running her own business, as she wanted to be her own boss and make her own decisions. Swiftly Services offers a wide range of home services, from unblocking sinks to painting and decorating.
Ellie’s parents agreed to lend her the money she needed to start up her business, interest free. They had an informal agreement that she would pay them back what she could afford each month.
Table 2 Cash Flow Forecast for Swiftly Services
February | March | April | May | |
£ | £ | £ | £ | |
Cash inflows | 2 000 | 2 300 | 2 800 | 3 300 |
Cash outflows | 20 300 | 800 | 1 100 | 1 450 |
Opening balance | 15 000 | (3 300) | (1 800) | (100) |
Closing balance | (3 300) | (1 800) | (100) |
After running Swiftly Services from February to May, Ellie was pleased to see that her cash flow forecast had been accurate. However, Ellie’s parents have unexpectedly asked her to repay £1000 a month, starting in June, as they are moving to a new house and need the money quickly. Ellie’s parents are now concerned about how soon they will get their money back. They have told Ellie that she should expand her portfolio of services and provide gardening services over the summer months. Gardening services would include mowing lawns, planting and weeding. They have forecast that this could bring in an extra £1000 cash inflow per month. However, to start offering these services, Ellie would need to spend £2000 on gardening equipment. This would increase her cash outflows. She would also need to hire someone to help her do the extra work.
Using Table 2, calculate the closing balance for May on the cash flow forecast.
State the formula for the closing balance and show your workings.
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Extract from a cash flow forecast
July | August £ | |
Total cash inflows | 3 420 | 3 200 |
Total cash outflows | 4 620 | 3 575 |
Net cash flow | (1 200) | (375) |
Opening balance | 2 000 | |
Closing balance |
Calculate the closing balance for August.
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Explain one use of cash in a business.
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Explain one benefit of using trade credit to improve cash flow.
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Extract from a cash flow forecast
March | April £ | |
Total cash inflows | 6,170 | 7,450 |
Total cash outflows | 5,980 | 8,040 |
Net cash flow | 190 | |
Opening balance | 900 | |
Closing balance |
Calculate the closing balance for April.
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Explain the difference between cash flow and profit.
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Ellie Swift is the owner of Swiftly Services. She always dreamed of running her own business as she wanted to be her own boss and make her own decisions. Swiftly Services offers a wide range of home services, from unblocking sinks to painting and decorating.
Ellie’s parents agreed to lend her the money she needed to start up her business interest free. They had an informal agreement that she would pay them back what she could afford each month.
Table 2 Cash Flow Forecast for Swiftly Services
February | March | April | May | |
£ | £ | £ | £ | |
Cash inflows | 2,000 | 2,300 | 2,800 | 3,300 |
Cash outflows | 20,300 | 800 | 1,100 | 1,450 |
Opening balance | 15,000 | (3,300) | (1,800) | (100) |
Closing balance | (3,300) | (1,800) | (100) | 1,750 |
After running Swiftly Services from February to May, Ellie was pleased to see that her cash flow forecast had been accurate. However, Ellie’s parents have unexpectedly asked her to repay £1000 a month, starting in June, as they are moving to a new house and need the money quickly. Ellie’s parents are now concerned about how soon they will get their money back. They have told Ellie that she should expand her portfolio of services and provide gardening services over the summer months. Gardening services would include mowing lawns, planting and weeding. They have forecast that this could bring in an extra £1000 cash inflow per month. However, to start offering these services, Ellie would need to spend £2000 on gardening equipment. This would increase her cash outflows. She would also need to hire someone to help her do the extra work.
Ellie is considering offering gardening services in June, July and August.
Recommend whether offering gardening services will improve the long-term future cash flow at Swiftly Services. Give reasons for your recommendation
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Sonya has been running Bambino Parties for two years. Last year, she made a profit of £8,000 and now wants to increase the number of parties by 20%.
A friend recently started to work for Sonya on a part time basis. She designs backgrounds for parties and these have proved very popular. Her friend has asked if she can become a partner in Bambino Parties. She is willing to invest £3,000 into the business in return for 50% of the profits and will work full time to help expand the business.
When Sonya takes a booking for a party, she asks for a 10% deposit and then receives the rest of the agreed price after the party. Her suppliers, people who provide venues, catering, and birthday cakes, expect to be paid in advance. She is worried about the effect this will have on cash flow.
Sonya has produced a cash flow forecast.
Figure 2
June | July | August | September | |
Total Income | 5,000 | 11,100 | 9,200 | 11,600 |
Total Expenses | 8,100 | 7,100 | 9,800 | 7,900 |
Balance brought forward | (1,300) | (4,400) | (400) | (1,000) |
Balance carried forward | (4,400) | (400) | (1,000) | 2,700 |
Analyse one impact on Bambino Parties' cash flow situation of allowing customers to pay for parties after the event.
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Devine Jewellery (DJ) plc is an international business that sells a range of luxury jewellery items such as bracelets, necklaces and rings. The business was started by British jewellery designer Dev Anand who developed a unique selling point (USP) of jewellery that can be personalised with a message or initials. This USP has attracted customers from all over the world. All DJ products are crafted from high quality gold and gemstones. This has enabled DJ to create an exclusive brand image that has attracted wealthy customers. DJ makes a healthy profit but, at times, it has required the use of an overdraft to ensure all important bills are paid on time.
DJ currently only sells its jewellery through the 60 stores it owns. This has allowed DJ to maintain its brand image and the high level of service customers expect. To increase sales, DJ has offered credit to customers spending over £2,000 so they can buy jewellery now and pay later. Many competitors also offer credit. This has enabled customers to purchase expensive pieces of jewellery and pay for them in ten equal instalments. Not all customers have been able to afford the monthly repayments and DJ has spent time and money trying to recover the debt.
Dev is concerned about the company's cash flow position. Recommend if DJ's cash flow position can be improved by:
selling and leasing back business assets, including factory equipment and company vehicles
withdrawing the credit facility offered on purchases over £2,000
Analyse the effect of each of these two options on DJ's cash flow position
Evaluate which of these two options will have the most positive impact on DJ's cash flow position
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