Analysis of cash flow information, problems and forecasting and improving cash flow- pages 40-42

Question 1

Positive closing balance

Answer 1

Large positive closing balance- the enterprise has plenty of cash. It can pay its bills, and there will be money for expansion plans or to invest
Small positive closing balance-the enterprise has cash to pay its bills and to trade, but may not have enough money to purchase new fixed assets

Question 2

Negative closing balance

Answer 2

Small negative closing balance- doesn’t have money to pay its bills, may be able to get a short-term bank loan or overdraft to continue trading to sort out its cash flow problem
Large negative closing balance- the enterprise does not have cash to pay its bills, needs to take immediate action to improve inflows and reduce outflows, or it may stop trading

Question 3

Why can cash flow problems happen?

Answer 3

• The enterprise may try to grow too quickly and not have enough money to buy raw materials to make products ordered
• The enterprise may have to pay unexpected bills
• Poor cash flow management- the cash flow forecast may contain errors
• Debtors take too long to pay

Question 4

Benefits of cash flow forecasting

Answer 4

• Plan for timings of inflows/outflows
• Spot potential problems
• Arrange overdraft limit
• Plan when to reduce spending

Question 5

Risks of not cash flow forecasting

Answer 5

• Not enough money to pay employees, suppliers or running costs
• Suppliers may refuse to trade with an enterprise that does not pay on time

Question 6

Ways to improve cash flow

Answer 6

• Reduce costs
• Increase sales revenue
• Delay payments to supplier
• Chase debtors
• Sell off unused assets
• Get overdraft or loan