Improving cash flow

Question 1

An entrepreneur had forecast that her business would have a cash balance of (£250,500) at the end of last month. Her opening balance was (£130,795) and her net cash flow for the month was (£111,425).
A) What was her cash balance at the end of the month?
B) Was it worse or better than she expected?

Answer 1

A) What was her cash balance at the end of the month?
(£130,795) + (£111,425) = (242,220)
B) Was it worse or better than she expected?
Better

Question 2

What causes cash flow problems?

Answer 2

Overtrading - business expands quickly without organising funds to finance the expansion
Allowing too much trade credit
Poor credit control - getting customers to pay on time
Inaccurate cash flow forecasting

Question 3

What causes variances?

Answer 3

One off occurrence, cancelled order
Seasonal variations
Trend - sales rising/falling steadily over a period of time
Self correcting - surge in demand followed by a slump

Question 4

How could cash flow be improved?

Answer 4

Improved control of working capital
Offer less trade credit
Arrange short term borrowing
Negotiate improved terms for trade credit
Debt factoring
Sale and leaseback

Question 5

How would profits be improved?

Answer 5

Reduce costs of production
Increase prices
Improve the business’s efficiency
Capacity utilisation
Reduce the number of substandard products
Improve methods of production
Eliminating unprofitable aspects of production

Question 6

Difficulties in improving cash flow and profit:

Answer 6

Identifying that there is a problem
Researching the cause of the problem
Coping with the issue - image
Decision making