3.5.4 - Improving Cash Flow and Profits

Question 1

How can a business improve its cash flow?

Answer 1

1. Have a good cash flow forecast
2. Manage working capital effectively
3. Choose the most appropriate source of finance

Question 2

What are some key factors of a good cash flow forecast?

Answer 2

1. It is updated regularly
2. It makes sensible assumptions
3. It allows for unexpected changes

Question 3

What are the benefits of cash flow forecasting to businesses?

Answer 3

• Ensures that the business can afford to pay suppliers and employees
• Highlight problems with customer payments
• Provides reassurance to investors and lenders that the business is being effectively managed
• Identifies potential shortfalls in cash balances in advance (allows for financial planning)

Question 4

What are the three types of working capital?

Answer 4

1. Inventory
2. Receivables
3. Payables

Question 5

What is inventory?

Answer 5

Any goods purchased and awaiting use or produced and awaiting sale.

Question 6

What are the three types of inventory?

Answer 6

• Raw materials
• Work - in - progress goods
• Finished goods

Question 7

How can businesses better manage their inventory?

Answer 7

• Keep smaller balances (JIT)
• Computerise (automate) ordering to improve efficiency
• Improve inventory control

Question 8

Why can cutting down inventory balances be potentially risky for the business?

Answer 8

Decreasing the amount of inventory held by the business can increase its vulnerability to stock outs.

Question 9

What are receivables?

Answer 9

Any amounts of money owed to a business.

Question 10

What are the two ways businesses can better manage their recieveables?

Answer 10

• Credit control
• Debt factoring

Question 11

What does credit control involve?

Answer 11

• Establishing new credit limits for customers
• Credit checking new and existing customers
• Monitoring the age of debts and chasing up bad debts
• Define appropriate terms and conditions for credit

Question 12

What is debt factoring?

Answer 12

The selling of receivables to a third party to generate immediate cash inflows. The third party will receive a percentage of money owed to it.

Question 13

What are payables (trade credit)?

Answer 13

Any amounts owed to suppliers for goods supplied on credit and not yet paid for.

Question 14

How can businesses better manage their payables?

Answer 14

• Delaying business payments so that cash is retained for longer
• Being careful to protect the business’s credit rating and reputation (avoid ethical issues with trade creditors)

Question 15

Define the sale of assets as a source of finance.

Answer 15

Selling spare or surplus assets as a way to achieve a short term boost in cash flow.

Question 16

Give some examples of assets which can be sold.

Answer 16

1. Spare land
2. Surplus equipment

Question 17

Define sales and leaseback as a source of finance.

Answer 17

Selling fixed assets and leasing them back from the new owner.