Cash Flow Cover

Question 1

Budgeted Cash Flow Cover (7 -> 4 -> 0.6)
Describe the trend pt 1

Answer 1

1. (define the indicator) The Cash Flow Cover shows the number of times the business’s cash from operations can cover
   the current liabilities in a reporting period. (net CF O/ avg CL

Question 2

Budgeted Cash Flow Cover (7 -> 4 -> 0.6)
Describe the trend pt 2

Answer 2

2. (describe the trend) Going 321 has seen a decline in this indicator from seven times to four times to 0.6 times over the three-month period.

Question 3

Budgeted Cash Flow Cover (7 -> 4 -> 0.6)
Describe the trend pt 3

Answer 3

3. (How it effects liquidity) This represents deterioration in
   the liquidity of the business, as at the end of June it cannot cover its current liabilities. This means that the business will have great difficulty in meeting its short-term debts as they fall due.

Question 4

State two possible reasons for the decreased trend in Budgeted CFC

Answer 4

Reason 1: The business took out a new loan, which would lead to an increase in the current
liabilities of the business.
Reason 2: The business may have suffered from a significant decrease in cash sales, which would lead to a decline in the amount reported as cash flows from operating activities.

Question 5

Explain and justify one strategy to improve the CFC and to avoid achieving this Budgeted CFC

Answer 5

1. (State the aim for the strategies)
   The business could put in place strategies to increase both cash sales and credit sales.
2. (The main focus)
   However, the focus should be on increasing cash sales so that slow paying accounts receivable do not create a further issue. They should consider promotions designed to bring in more cash customers to the business, including ‘2 for 1’ offers or special bulk deals. Perhaps cheaper prices for
   customers paying cash could also be considered.
3. Expenses should also be reviewed to ensure there is no unnecessary spending in the next quarterly period. These strategies should help ensure that net cash flows from operating activities increase and therefore help improve the Cash Flow Cover in the coming months.