3.5.4 Making financial decisions: improving cash flow and profits

Question 1

What are causes of poor cash flow?

Answer 1

• Poor management
• The business is making a loss
• Offering customers too long to pay
• Over optimistic forecasting

Question 2

How is poor management a cause of poor cash flow?

Answer 2

a manager may not have sufficient financial training or experience and end up making decisions that negatively affect cash flow

Question 3

How is the business making a loss a cause of poor cash flow?

Answer 3

the business is receiving less revenue than they are paying out in costs. This makes the payment of bills very difficult

Question 4

How is offering customers too long to pay a cause of poor cash flow?

Answer 4

if you have to pay your bills before you receive payment from your customers you are likely to experience a cash shortage

Question 5

How is over optimistic forecasting too long to pay a cause of poor cash flow?

Answer 5

firms are sometimes over optimistic when forecasting their cash flow. Essentially, they could end up spending money they don’t have because they think they will make it back in the future (according to their forecast)

Question 6

How can firms ensure a healthier cash flow?

Answer 6

For cash flow to be healthy, firms want long credit terms from suppliers and want to collect money from debtors as soon as they can. They will need sufficient working capital to make sure they can pay all the bills

Question 7

How can cash flow be improved?

Answer 7

• Cut costs
• Use an overdraft
• New source of cash inflows
• Reschedule payments