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Question 1

What is the difference between cash and profit?

Answer 1

Cash is not the same as profit. A business can have cash but still incur losses or be profitable but have poor cash flow.

Question 2

Define investment in the context of business.

Answer 2

Investment is the spending on capital or productive assets, such as production facilities, business premises, and machinery.

Question 3

How can investment affect cash flow in the short term?

Answer 3

Investment expenditure often leads to a negative net cash flow in the short term due to cash being spent on assets.

Question 4

What happens to cash flow when a business sells an asset?

Answer 4

Selling an asset (divestment) improves cash flow but usually occurs due to falling profits.

Question 5

What is a common misconception about cash flow?

Answer 5

Many believe that a positive cash flow figure means a business is profitable, which is incorrect.

Question 6

List the main causes of cash flow problems.

Answer 6

• Overtrading
• Over borrowing
• Overstocking
• Poor credit control
• Unforeseen changes

Question 7

What is overtrading?

Answer 7

Overtrading occurs when a business expands too quickly without sufficient resources, leading to cash flow issues.

Question 8

Explain the term ‘over borrowing’.

Answer 8

Over borrowing refers to raising a large proportion of capital through external finance, increasing cash outflows on interest payments.

Question 9

Define poor credit control.

Answer 9

Poor credit control arises when firms offer prolonged credit periods to customers, leading to cash flow problems.

Question 10

What is the impact of unforeseen changes on cash flow?

Answer 10

Unexpected changes in demand or machinery breakdowns can lead to serious cash flow problems.

Question 11

What are three generic strategies for dealing with cash flow problems?

Answer 11

• Reducing cash outflows
• Improving cash inflows
• Obtaining additional sources of finance

Question 12

Fill in the blank: Effective cash flow management is vital for _______.

Answer 12

[investment opportunities]

Question 13

What is one method to reduce cash outflows?

Answer 13

Seek preferential credit terms by negotiating extended credit with suppliers.

Question 14

How can businesses improve cash inflows?

Answer 14

By tightening credit control or requiring cash payments.

Question 15

What is debt factoring?

Answer 15

Debt factoring involves an external party managing the collection of money owed by debtors, providing immediate cash access.

Question 16

What does the Pareto Principle suggest regarding cash flow management?

Answer 16

Businesses should focus 80% of their time and resources on boosting cash inflows.

Question 17

What is the significance of cash flow forecasts?

Answer 17

They summarize cash inflows and outflows, helping manage financial matters in business organizations.

Question 18

Define personal funds in the context of business.

Answer 18

Personal funds refer to the capital contributed by the owner from personal savings or assets for business use.

Question 19

What does the term ‘salary’ refer to?

Answer 19

Salary is the regular payment made to employees for their work, typically on a monthly basis.

Question 20

True or False: A business can be profitable and still experience cash flow issues.

Answer 20

True

Question 21

What was the purchase price of Motorola by Lenovo?

Answer 21

$3 billion

Question 22

What is the role of effective cash flow management in the pharmaceutical industry?

Answer 22

It is necessary for commercializing drugs, which can take around 17 years.

Question 23

Define the term cash flow forecast

Answer 23

A cash flow forecast is a financial tool that predicts the liquidity position of a business in the future, based on certain assumptions.

Question 24

Outline a possible reason why profitable firms like Dude’s Dance Studios Ltd. might experience cash flow problems

Answer 24

Profitable firms may experience cash flow problems due to delayed payments from credit sales, which can lead to a mismatch between revenues and cash inflows.

Question 25

List strategies for dealing with cash flow problems

Answer 25

* Lower cash outflows * Raise cash inflows * Additional finance * Preferential credit terms * Tighter credit control * Overdrafts * Seek alternative suppliers * Cash payments only * Sale of fixed assets * Better stock control * Change pricing policy * Debt factoring * Reduce unnecessary expenses * Broaden product portfolio * Government assistance * Leasing or renting

Question 26

True or False: Cash flow forecasts show the profitability of a business.

Answer 26

False

Question 27

Fill in the blank: The _______ Principle suggests that businesses should focus 80% of their time and resources on boosting cash inflows.

Answer 27

Pareto

Question 28

What is a key limitation of cash flow forecasting?

Answer 28

Inaccuracies can occur due to factors such as poor market research, demoralized workforce, machine failure, and external shocks.

Question 29

What impact do competitors have on a firm's cash flow?

Answer 29

The behavior of rival firms can directly affect a firm's cash flow position and its level of success.

Question 30

How can economic changes affect cash flow?

Answer 30

Changes in economic factors can present opportunities or threats, impacting a firm's cash flows, such as lower interest rates boosting consumer spending.

Question 31

What is the significance of a contingency fund for businesses?

Answer 31

A contingency fund sets aside cash for unexpected changes and emergency use, helping businesses manage uncertainty.

Question 32

Explain the relationship between cash flow and human resources strategy.

Answer 32

Sufficient cash flow is necessary to pay employees on time, which is crucial for motivation and productivity.

Question 33

What are cash cows in relation to cash flow?

Answer 33

Cash cows are products that generate a large and regular stream of cash for the business, funding marketing activities.

Question 34

Fill in the blank: The working capital cycle refers to the time interval between cash _______ for costs of production and cash inflows from customers.

Answer 34

outflows

Question 35

What is the key takeaway regarding cash flow and profit?

Answer 35

Cash is regarded as more important than profit in the short term; firms may not survive if they cannot sustain positive net cash flows.

Question 36

What should businesses do to ensure effective cash flow management?

Answer 36

Regularly update cash flow forecasts to reflect changes in the external environment and ensure decision-making is based on current information.

Question 37

What is the effect of external shocks on cash flow forecasts?

Answer 37

External shocks such as wars or health scares can make initial cash flow forecasts less accurate.

Question 38

Examine the options available to Dude's Dance Studios Ltd. in dealing with its cash flow problems

Answer 38

Options include improving credit control, seeking alternative suppliers, and revising pricing policies.