Practise calculating opening and closing cash balances, explaining forecast purposes and analysing methods that improve cash flow without confusing liquidity with profit.
Explain one method of improving cash flow for a business.
Explain one method of improving cash flow for a business.
Indicative content
Responses may include:
AO1 Knowledge and understanding
1 mark for identifying one method of improving cash flow for a business
- Overdraft
- Short-term loan, sale of assets
- Sale and leaseback
- Reduce customer credit terms / discounts for early payment
- Debt factoring
- Increase cash inflow
- Decrease cash outflows - delay payments to suppliers (creditors)/obtain discounts
- Delay spending on capital equipment
- Use leasing, cut overheads
- Produce a cash flow forecast
Also accept long-term solutions:
- More motivated staff
- Increased revenue
- Increased productivity
- Improved inventory management
AO2 Application
2 marks for a developed application/explanation of one method of improving cash flow for a business
1 mark for a limited application/explanation of one method of improving cash flow for a business
1(b)
- An overdraft is where a bank agrees to a business borrowing up to an agreed limit as and when required - therefore increase cash inflow
- A short-term loan allows a fixed amount to be borrowed for an agreed length of time - which increases cash inflow
- Sale of assets allows cash to be obtained from selling off redundant assets - which will boost cash inflow
- Sale and leaseback allows an asset to be sold then leased back - increase cash inflow
- Reduce credit terms to customers i.e. from 2 months to 1 month - will enable cash to be brought into the business sooner
- Debt factoring enables customers' bills to be bought - means an immediate cash boost
- Make more sales - reduce price to encourage customers to buy more, more advertising
- Delay payments to suppliers i.e. pay a bill after 3 months instead of 2 months - cash outflows will fall in short term
- Delay spending on capital equipment - means money is kept in the business that might have gone out
- Use leasing - no large cash outlay is made - so less money going out of the business
- Cut overheads (that do not directly affect output) - i.e. promotion costs - so less money going out of the business
- More motivated staff - make less mistakes so less wastage of materials
- Improved productivity - higher output so potential for higher sales
- Improved inventory management - can free up cash
- Increase revenue - by diversifying
Accept all valid responses.