Unit 11 Entrepreneurship

Explain how a cash flow statement helps a business to determine when, where, and how much money will flow into and out of the business.

A cash flow statement is a business's best guess, or estimate, as to when, where, and how much money will flow into and out of the business.

What is the significance of a positive cash flow?

A positive cash flow means that the business is solvent and has enough money on hand to meet its monthly obligations. Businesses with extra cash are able to invest that money in the business to grow and expand.

Anything of value a business owns

Assets

What are a business's assets?

Assets are anything of value that a business owns. Businesses sometimes sell assets to bring in cash.

Money available at beginning of month

Beginning cash balance

Explain how to determine each of the following seven components of a cash flow statement: Beginning cash balance Cash receipts Total cash receipts Total cash available Cash payments Total cash paid out Ending cash balance

Beginning cash balance—the amount of money available at the beginning of each month, and the same amount as that listed for the previous month's ending balance Cash receipts—the amount of money flowing in from specific sources such as sales of goods and services or loans Total cash receipts—the total of all of the sources of income listed under cash receipts Total cash available—the total amount of cash receipts plus the beginning cash balance Cash payments—the amount of money flowing out for cost of goods, fixed expenses, and variable expenses Total cash paid out—the total of all of the cash payments Ending cash balance—the amount of cash remaining at the end of the month after subtracting total cash paid out from total cash available, and the amount that is listed as beginning cash balance for the next month

What is the formula commonly used to calculate cash flow?

Cash flow is calculated by subtracting total cash paid out from the total cash receipts.

What is cash flow?

Cash flow is the movement of funds into and out of a business.

Estimate of money coming in and going out

Cash flow statement

Interest income and loan money

Cash receipts

A major expense for retailers

Cost of goods

Amount of cash left at end of month

Ending cash balance

What do existing businesses use to predict future cash flow?

Existing businesses use information from past financial statements to predict future cash flow. They often review previous profit-and-loss statements, and combine this information with information about industry trends and predictions.

What should a business do if it has a negative cash flow?

If a business has a negative cash flow, it does not have enough money on hand to meet its monthly obligations. That means the business will need to obtain additional money, such as borrowing funds or withdrawing funds from a savings account, to continue operating.

Protection from financial losses

Insurance

Money earned on savings accounts

Interest

Why is it important for a business to monitor cash flow?

It is important for businesses to monitor cash flow to make sure they have enough cash to operate. Without sufficient cash, businesses may not be able to pay their expenses. They may even fail.

Why is it important to know how much money is flowing into a business?

Knowing how much cash is flowing into the business is probably the most important information that a cash flow statement provides. Otherwise, there is no way to know if the business will have enough cash to pay the bills.

Funds obtained from banks

Loans

All costs involved in running a business

Operating expense

Money withdrawn to pay owners of a business

Owner equity

Often a business's largest expense

Payroll

Money from selling land or equipment

Sale of assets

A main source of cash for a business

Sale of products

Identify seven main sources of cash flowing out of a business.

Seven main sources of cash flowing out of a business are: operating expenses, cost of goods, assets, owner equity, loan payments, taxes, and miscellaneous.

Cash from investors

Start-up money

Money paid to government

Taxes

Identify five main sources of cash flowing into a business.

The five main sources of cash flowing into a business are start-up money, sale of products, loans, interest, and sale of assets.

What is the primary way in which cash flows into an existing business?

The primary way in which cash flows into an existing business is through the sale of goods and services.

All money available to spend each month

Total cash available

All of a business's cash payments

Total cash paid out

All of the sources of a business's income

Total cash receipts

Bills that customers do not pay

Uncollectible acc

What do many businesses do when more cash is flowing in than is flowing out?

When more cash is flowing in than is flowing out, businesses often save or invest the surplus to create a safety net for slow times. Then, they can dip into the surplus to keep the cash flow balanced.