3.4.1 Cash flow management

Question 1

Define cash inflows and cash outflows

Answer 1

Cash inflows include sales, accounts receivable and commissions, and cash outflows include wages, payments to suppliers, insurance and loan repayments

Question 2

Why is it essential to manage cash outflows and inflows

Answer 2

Monitoring all cash inflows and outflows is essential in effectively managing the business. IF there are more cash outflows than cash inflows there is a cash flow problem

Question 3

What are the key aspects of financial management?

Answer 3

• Cash flow management
• Working capital management
• profitability management
• global financial management

Question 4

What are the three types of cash flows a business needs to monitor?

Answer 4

• Operation flows
• investment flows
• financial flows

Question 5

Define operational flows

Answer 5

Operational flows, which relate to producing and selling the output of the business

Question 6

Define investment flows

Answer 6

Investment flows, which relate to buying and selling the non-current assets such as property or new equipment

Question 7

Define Financial flows

Answer 7

Financial flows, which relate to the flows of cash associated with debt and equity financing such as interest payments

Question 8

What is the cash flow statement and what does it enable managers to do?

Answer 8

The cash flow statement is a forecast of monthly cash inflows and outflows. It enables managers to see the periods when the business will have a relative abundance of cash and when the business will not have much cash flow

Question 9

Identify the two main strategies used to effectively manage cash flow

Answer 9

• Distribution of payments
• Discounts for early payments

Question 10

Explain distribution of payments

Answer 10

For some businesses that receive regular cash inflows, it is desirable to spread payments (cash outflows) evenly throughout the year. Making regular monthly payments rather than lump-sum payments reduces the likelihood of cash shortages at points of the year. An example of this occurs where businesses such as telephone providers and insurance companies offer to split an annual bill into monthly instalments. Regular payments also mean the business is able to cope better with unexpected costs.

Question 11

Explain Discounts for early payments and outline its usefulness

Answer 11

Discounts are reductions in the price of the good or service if payment is made earlier than required. Businesses can offer discounts for cash and early payments. This encourages quick payment from customers (debtors), improving cash flow for the business. It can be a cheaper option than the use of an overdraft. Discounts for early payment are also a better strategy than late fees as they encourage positive working relationships with customers. However, a late fee policy may be necessary to prevent customers (debtors) stretching their payments past the due date

Question 12

How can the use of overdrafts and lines of credit assist in cash flow?

Answer 12

The use of overdrafts and lines of credit will assist businesses in periods where cash outflows are greater than cash inflows. This is an expensive short term solution.

Question 13

Define factoring

Answer 13

Factoring occurs when a business sells some or all of its accounts receivable to a finance company at a discount for immediate cash. This is one way that a business can convert what is owed into cash to relieve a tight cash flow statement