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“Cash Flow is the lifeblood of any business and its management is critical to business survival.” In September 2008, Buttercup Garden Centre prepared the following Cash Flow Forecast - Leaving Cert Business - Question C - 2009
Question C
“Cash Flow is the lifeblood of any business and its management is critical to business survival.” In September 2008, Buttercup Garden Centre prepared the following C... show full transcript
Worked Solution & Example Answer:“Cash Flow is the lifeblood of any business and its management is critical to business survival.” In September 2008, Buttercup Garden Centre prepared the following Cash Flow Forecast - Leaving Cert Business - Question C - 2009
Step 1
Explain the benefits to Buttercup Garden Centre of preparing a Cash Flow Forecast.
Answer
Preparing a Cash Flow Forecast provides several benefits for Buttercup Garden Centre:
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Identification of Cash Inflows and Outflows: The forecast helps in identifying the expected cash inflows from sales and the necessary cash outflows for expenses, enabling better financial planning.
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Improved Financial Management: By predicting the cash flow positions, the business can plan for any potential shortages or surpluses, thus aiding in maintaining operational stability.
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Strategic Planning: It allows the management to make informed decisions regarding investments, expansion, and other financial strategies, ensuring resources are allocated efficiently.
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Access to Financing: A robust cash flow forecast can make it easier to secure loans or credit from financial institutions, as it demonstrates responsible financial management to lenders.
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Risk Mitigation: By highlighting potential deficits in cash flow, the business can implement corrective actions early, such as cost-cutting or seeking additional revenue sources, thereby reducing financial risk.
Step 2
Outline how Buttercup Garden Centre could improve the Cash Flow position of its business.
Answer
Buttercup Garden Centre can improve its Cash Flow position through several strategies:
A. Purchase of Equipment – Capital Expenditure: By postponing non-essential equipment purchases, the business can conserve cash in the short term to manage current outflows more effectively.
B. Access to Credit/Bank Overdraft: Negotiating a bank overdraft with their bank could provide immediate cash flow support, especially if the business needs to cover essential costs before cash inflows are received.
C. Credit Control: Improving credit control measures by enforcing stricter payment terms could help reduce the time it takes to collect debts from customers, thus increasing cash inflows more rapidly.
D. Control of Overheads: Reducing overhead costs, such as Wages from €6000 to €5700 (a 5% reduction), from October to December, can help in alleviating cash flow pressure. Additionally, reviewing and adjusting entries such as staffing can help manage cash concentration.