3.5.4 Making Financial Decisions: Improving Cash Flow and Profits.

Question 1

What are the methods of improving cash flow?

Answer 1

Bank overdraft.

Debt Factoring.

Sales and Leaseback.

Leasing of non current assets.

Question 2

How does a bank overdraft improve cash flow?

Answer 2

Allows use of an overdraft, therefore a negative balance is held.

Question 3

What is working capital?

Answer 3

Day-to-day finance used in a business consisting of current assets - current liabilities.

Question 4

Why must a firm manage its working capital?

Answer 4

To stay solvent.

Question 5

In terms of cash management, what are the two options a business can arrange to get cash?

Answer 5

Agree an overdraft.

Set aside a contingency fund.

Question 6

(Cash management) When would we need to manage receivables?

Answer 6

When deciding whether to offer credit to a customer.

Question 7

(Cash management) How do we manage receivables?

Answer 7

Obtain a credit rating.

Controlling product quality - less likely to delay payment.

Benefits vs drawbacks of the credit offer.

Managing credit control.

Question 8

How do we manage inventory?

Answer 8

Can keep high levels of inventory for buffer stock or can operate in a JIT system.

Question 9

How do we manage payables?

Answer 9

Usually expect credit terms when purchasing from suppliers. However, longer term credits can delay payments, therefore keeping more cash.

Question 10

How else can a business improve its cash flow?

Answer 10

Diversifying product portfolio.

Improved planning, monitoring and control.

Contingency fund to help with unexpected loss of income.

Question 11

What are the difficulties of improving cash flow?

Answer 11

Seasonal demand.

Overtrading.

Over investment in long term assets.

Unforeseen changes.

Losses or low profits.

Question 12

How how does overtrading make improving cash flow difficult?

Answer 12

Firms expand rapidly without organising long term funds, therefore putting a strain on their working capital.

Question 13

How does over investment in long term assets make improving cash flow difficult?

Answer 13

May invest in long term assets to grow, but leave themselves with inadequate cash for day to day payments.

Question 14

What are the drawbacks of a bank overdraft?

Answer 14

Interest payments drain businesses cash.

Question 15

What are the drawbacks of debt factoring?

Answer 15

Sum paid will be less than sum owed to the business.

Question 16

What are the drawbacks of sales of assets?

Answer 16

Assets such as buildings and machinery are more difficult to quickly sell off.

Question 17

What are the drawbacks of sale and leasback?

Answer 17

Assuming the business buying the asset wishes to make profits from it, selling it will pay more in rent than it receives from it sales.

Question 18

What are the drawbacks of leasing of non current assets?

Answer 18

Selling them will pay more in rent than it receives in sales.

Question 19

What are the drawbacks of cash management?

Answer 19

Keeping a large contingency reduces risk but limits the level of investment undertaken by a business.

Question 20

What are the drawbacks of chasing receivables for prompt payment?

Answer 20

May lead to a loss of goodwill.

Question 21

What are the drawbacks of reducing inventory levels?

Answer 21

Reduces sales and profit because the products may not be available to prospective customers.

Question 22

What are the drawbacks to delaying payments to payables.

Answer 22

Lead to a loss of goodwill.

Question 23

What are the most basic methods of increasing profit?

Answer 23

Changing price.
Decreasing costs.
Increasing sales volume.

Question 24

How will changing the price increase profit?

Answer 24

Widen the profit margin - generate more profit.

Question 25

How can decreasing costs improve profit?

Answer 25

Cutting direct costs will increase profit margins.

Question 26

What are other methods of improving profitability/profit?

Answer 26

Investment in fixed assets e.g. new equipment.

Product development and innovation.

Marketing.

Human resource strategies.

Question 27

What are internal difficulties changing price (decreasing costs) to improve profit?

Answer 27

Reducing wages.

Cutting raw material costs - lower quality.

Cutting marketing budget - lower sales due to cut promotion.

Question 28

How can increasing sales volume to decrease costs improve profitability/profit be difficult?

Answer 28

Requires effective marketing, good customer service and high quality production along with a large amount of coordination from the business.

Question 29

What are external factors influencing profits/profitability?

Answer 29

Competition.

Market conditions.

Consumers incomes.

Interest rates.

Demographic features.

Environmental issues.