CAIE A-Level Business AS 5.3 Forecasting and Managing Cash Flows Questions

Practise completing cash-flow forecasts, analysing their planning and control uses and recommending methods to improve timing of receipts, payments and closing balances.

Exam points

calculate net cash flow and closing balance from opening balance, inflows and outflows
analyse how a forecast identifies shortages and supports finance, spending or timing decisions
evaluate an improvement method by its effect on cash timing, relationships, cost and feasibility

Covered syllabus points

5.3.1—Cash flow forecasts

[Maximum number: 3]

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.

[Maximum number: 3]

Refer to Table 1.1. Calculate the forecast closing balance in March 2024.

[Maximum number: 3]

Office Furniture Designs (OFD)

Markus is an entrepreneur and is planning to set up a private limited company called OFD in four weeks' time. OFD will be an online retailer selling office furniture directly to business customers. Products will be sent directly to customers from OFD's warehouse. OFD's product range will include office chairs, desks and filing cabinets.

Markus will have limited start-up funds. OFD will operate in a competitive market and Markus is keen to offer high-quality customer service. He also will have to think carefully about opportunity cost.

As part of his business planning, Markus has prepared a cash flow forecast (see Table 1.1).

$Table 1.1 OFD's cash flow forecast June - August 2023 (\$ 000)$

Table 1.1 OFD's cash flow forecast June - August 2023 (\$ 000)

Markus plans to offer all customers one month trade credit. However, as OFD is a new business, suppliers may insist on payment on delivery. Markus is currently researching sources of finance to improve OFD's cash flow.

OFD will need five employees who will work in the warehouse and three customer service assistants. Markus plans to offer two weeks of induction training to all employees.

Refer to Table 1.1. Calculate the forecast closing balance for August 2023.

All question bank results loaded

Covered syllabus points

Question 1

Question 2

Question 3