Level 3 Applied Business AO2 2d Cash Flow Monitoring

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Why does excessive borrowing cause cash flow problems?
New businesses need expensive equipment, substantial marketing, prime business location and so need loans which need paying back with interest. The businesses doesn't do too well and they struggle to meet the monthly repayments on loan and mortgages.
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Why does excessive trade credit cause cash flow problems?
If companies give too much trade credit then this may mean there are not enough money coming in from sales to match the money going out. So a business is faced with bills and wages before it receives the income from sales.
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Why does excessive stock cause cash flow problems?
Buying in bulk is cheaper than in small amounts therefore too much on outflow and not enough inflow and stock being idle.
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Why does over trading cause cash flow problems?
This is when a business expands too quickly. Expansion and growth can mean payments very high for buildings and equipment, etc. This can cause a business to encounter substantial financial outflow without enough sales coming in.
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Why do external factors cause cash flow problems?
Difficult to anticipate & remedy as they are out of control of the company. e.g. competitors > loss of sales, changes in interest rates > more payments, change in exchange rates > effects imports & exports, product obsolescence, change in legislation
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Why does poor planning cause cash flow problems?
Forgetting to forecast cash flow, forget expenditure like taxes, over optimistic, don't recognise impact of seasonal factors
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Give three reasons for analysing a company's cash flow statement...
1. Can determine whether problem will get better/worse over time 2. Can find the cause (one off problem or underlying cause of many?) 3. Can look at timings of receipts and payments > can large payments be split into smaller ones?
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How can a business improve it's cash flow?
•Short term overdraft •Use just in time (hold less stock) •Improve credit control (get customers to pay up) •Rescheduling payments (split large payments into smaller ones) •Selling fixed assets •Extending trade credit from suppliers >longer to pay up
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How does a business benefit from effective and careful management of cash flow?
•Less likely to use overdraft if finances managed well > reduces interest charges > lower costs higher profits •Can pay suppliers quickly > May offer discount > Reduces cost •Customers doubt ability to supply goods > don't place orders > shuts down
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State three reasons why a manger might draw up an inaccurate cash flow forecast.
•Inaccurate assumptions about future > can forecast the cash it will earn too low or too high •Unexpected costs > price of raw materials/labour may rise, machinery breakdowns •Inexperience > little experience of managing a business
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Other cards in this set

Card 2

Front

Why does excessive trade credit cause cash flow problems?

Back

If companies give too much trade credit then this may mean there are not enough money coming in from sales to match the money going out. So a business is faced with bills and wages before it receives the income from sales.

Card 3

Front

Why does excessive stock cause cash flow problems?

Back

Preview of the front of card 3

Card 4

Front

Why does over trading cause cash flow problems?

Back

Preview of the front of card 4

Card 5

Front

Why do external factors cause cash flow problems?

Back

Preview of the front of card 5
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