Topic 5.4 - Improving cash flow and profits

Question 1

Methods of improving cash flow

Answer 1

• reliable cash flow forecasting
• keep costs under control
• manage working capital
• choose the right source of finance

Short term

• cut costs
• reduce current assets
• increase current liabilities
• sell surplus

Long term

• increase equity
• increase long term liabilities
• reduce net outflow on fixed assets

Question 2

Managing stock

Answer 2

• stockholding is costly
• keep smaller volume ( JIT )
• computerise ordering to improve efficiency
• improve stock control
• cut spending on stock but leaves business vulnerable to stock out

Question 3

Managing amount owed by customers

Answer 3

• credit control
• policies on credit to give and T&C
• credit checking
• selling of debts to debt factors
• cash discounts for prompt payment
• improved record keeping

Question 4

Debt factoring

Answer 4

• generated cash

- reduce income and profit margins

Question 5

Cash paid to suppliers

Answer 5

• trade credit
• delayed payment
• careful not to damage credit reputation and rating
• trade creditors are seen as a free source of capital
• ethical issues

Question 6

Methods of improving quality

Answer 6

• increase revenue
• decrease costs
• cut staff levels
• switch suppliers
• reduce wastage

Question 7

Increasing price

Answer 7

• increase revenue
• sales may fall
• depends on price elasticity of demand

Question 8

Cut costs

Answer 8

• may damage quality

- higher profits per sale

Question 9

Difficulties of improving cash flow

Answer 9

• supplier may not like longer credit terms
• customers may find businesses with more favourable credit terms
• debt factoring fees take a lot of profit so hard to carry on long term
• sale of assets may cause problems long term