Financial Management

Question 1

Methods of improving cash flow

Answer 1

• You can reduce the amount of inventory held
• Ensure that credit customers pay on time
• Extend credit terms with suppliers
• Sell more goods for cash (maybe with a discount) and less on credit
• Arranging or increasing an overdraft facility
• Debt factoring

Question 2

What is a problem with reducing the amount of inventory held

Answer 2

You can run out if inventory

Business may not be able to cope with increased demand form customers

Question 3

Whats a benefit of reducing the amount of inventory held

Answer 3

It frees up capital that was previously tied up in unsold goods

Question 4

What’s a benefit of selling more goods for cash (with a discount)

Answer 4

The business instantly receives the money from cash sales unlike credit sales where businesses wait for customers to pay. Incurring delays

Reduced delay from cash sales can improve cash flow as more money can be distributed elsewhere in the business (e.g inventory, advertising, marketing)

Question 5

What is a problem with selling goods (with a discount) and using less credit

Answer 5

Discounts allowed are an additional cost to the business which decreases profit

Damages cash flow as discount allowed is an outflow of money

Question 6

What is a problem with using an overdraft facility

Answer 6

It involves interest which is an additional cost

The banks may not allow this as they may not think the business can repay debts

Question 7

What is an overdraft facility

Answer 7

A short term credit line linked to a bank account, allowing you to spend more money than you have in your account

Question 8

What is a benefit of an overdraft facility

Answer 8

It is flexible as it allows business to borrow extra money from the bank to cover debts and eventually pay it back to the bank

Good for short term cash flow

Question 9

What is a benefit of ensuring credit customers pay ontime

Answer 9

Reduced delays of money being received to the business

Can offer discounts for those pay the money back quickly (improving customer-business relations)

Question 10

Who are credit customers

Answer 10

Credit customers are customers who can make purchases or obtain services on a delayed payment basis

Question 11

What is a problem of ensuring credit customers pay ontime

Answer 11

• It can be tricky to enforce as there are variety of reasons why its difficult
• Including financial hardship, unexpected expenses
• Simply forgetting to make payments

Other factors can include difficulty with budgeting

• high interest rates
• Or having multiple debts

Question 12

Whats a problem with extending credit terms with suppliers

Answer 12

• Suppliers may not be willing to provide for longer credit terms
• Might be hard to find suppliers that can agree with your credit terms

Question 13

Methods of increasing profits through revenue

Answer 13

• Change the selling price
• Advertising and other promotional methods
• Improve or change the products
• Expand: open new branches, break into new regions

Question 14

What is a problem with changing the selling price

Answer 14

It may result in revenue figures decreasing depending on the price elasticity of demand

Question 15

What is a problem with advertising and other promotional methods

Answer 15

Additional fixed cost which could cause profits to fall

Question 16

Whats a problem with advertising or other promotional methods

Answer 16

Additional fixed cost which causes profits to fall

Question 17

What’s a problem with improving or changing products

Answer 17

the initial cost of improving products damage cash flow

Question 18

Whats a problem with expanding and opening new branches

Answer 18

the initial cost of expansion damages cash flow unless long term finance can be obtained

Question 19

Methods of improving profits by decreasing costs

Answer 19

• Make some staff redundant
• Hold less inventory (reducing storage costs, wastage etc)
• Buy in bulk (for discounts)
• Find cheaper suppliers
• Automation
• Move to a cheaper location
• Increase the efficiency of workers

Question 20

Whats a problem of making staff redundanct

Answer 20

• May decrease the level of customer service
• The redundancy payments could damage outflows

Question 21

Whats a problem with holding less inventory

Answer 21

Could run out of inventory and let customers down

Question 22

Whats a problem with buying in bulk

Answer 22

Bad for cash flow
More danger of inventory being damaged or unsold

Question 23

Whats a problem of finding cheaper suppliers

Answer 23

Quality of goods might decrease

Question 24

Whats a problem of automation (investing in technology to replace some workers)

Answer 24

Initial costs damages cash flow

Maintenance costs will be high

Question 25

Whats a problem with moving to cheaper location

Answer 25

Fewer customers (if a retailer) Finding a workforce (if a manufacturer

Question 26

Increases efficiency of workers

Answer 26

Initial training is an additional cost and damages cash flow