5.4 Making Financial Decisions

Question 1

When do cash flow problems occur?

Answer 1

When inflows cannot cover the outflows.

Question 2

Define cash flow.

Answer 2

The money moving in and out of a business.

Question 3

How can overtrading cause cash flow problems?

Answer 3

Buying with short term cash rather than arranging suitable finance options can lead to an inability to pay short term debts.

Question 4

How can credit terms cause cash flow problems?

Answer 4

Sales are made, so costs are paid, but payment is not received until a later date.
So may not have cash to cover the costs.

Question 5

Name 4 causes of cash flow problems.

Answer 5

Overtrading.
Poor management of credit terms.
Poor sales and low profits.
Seasonal demand.

Question 6

How can poor sales and low profits cause cash flow problems?

Answer 6

Low amounts of revenue to cover costs such as salaries, rent etc.

Question 7

How can seasonal demand cause cash flow problems?

Answer 7

Sales may fluctuate throughout the year, but costs till incur year round.

Question 8

Name 4 methods of improving cash flow problems.

Answer 8

Arranging short term borrowing of money.
Debt factoring.
Sale of assets.
Offer less trade credit to debtors/discounts for early repayments.

Question 9

Why may some firms have difficulty improving cash flow?

Answer 9

May not be able to reduce stock e.g. retail.
Cost of finance (interest).
Short term decision making could impact long term e.g. cheaper suppliers, affect quality, affects future sales.
Impact on brand image.