Chapter-20

Question 1

What is a cash-flow forecast?

Answer 1

A cash-flow forecast is an estimate of the future cash inflows and outflows of a business.

Question 2

What factors affect the length of a business’s working capital cycle?

Answer 2

i) The level of inventories held

ii) The time taken to produce goods

iii) How quickly the business sells its products

iv) The length of credit given to customers

Question 2

What is net cash flow?

Answer 2

Net cash flow is the cash inflow minus the cash outflow.

Question 2

What are some ways a business can overcome a short-term cash-flow problem?

Answer 2

i) Offer discounts to customers to encourage faster payment

ii) Negotiate longer credit terms with suppliers

iii) Delay the purchase of non-current assets

iv) Find other sources of finance for purchasing non-current assets

Question 2

What is liquidity in a business context?

Answer 2

Liquidity is the ability of a business to pay its short-term debts.

Question 2

What are the options a business has if it cannot delay the purchase of a delivery vehicle and wants to improve cash flow?

Answer 2

The business can either use another source of finance, such as hire purchase, leasing, or a bank loan, or arrange a short-term overdraft with the bank to cover the cash shortfall.

Question 2

What are credit sales?

Answer 2

Credit sales are goods sold to customers who will pay for them at an agreed date in the future.

Question 2

How can a business improve its working capital?

Answer 2

i) Reducing inventory levels

ii) Negotiating longer credit terms with suppliers

iii) Collecting payments from customers more quickly