5.3. Forecasting and managing cash flows
A subsection of Business Studies, 9609, through 5. Finance and accounting (AS Level)
Listing 10 of 18 questions
Paul’s Clothes (PC) PC is a sole trader business that is owned and managed by Paul. Paul financed the business using a mortgage on his home. PC has two retail clothes shops in neighbouring towns in country A. Both shops sell a range of suits, shirts, ties and footwear for men. PC has been trading for four years and Paul has been pleased with the profits made. Paul is now deciding on a new business objective. PC has a Unique Selling Point (USP) that focuses on quality. The range of clothes sells at high prices. Unemployment has started rising in the country and average incomes are falling. Paul has prepared an overall cash flow forecast for both shops, as shown below in Table 1. Paul is considering buying a computerised inventory management system. Table 1: Cash flow forecast for the next six months ($000s) Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Cash in: Revenue X Cash out: New computerised inventory system Employee costs Purchases Marketing Opening Balance (1) Closing Balance (1) *Numbers in brackets indicate a negative figure. The purchase of a new computerised inventory management system will be an important innovation for PC. It will ensure that Paul can access sales information about products quickly and place orders with suppliers before items are sold out. Define the term ‘Unique Selling Point (USP)’ (line 6). Briefly explain the term ‘business objective’ (line 5). Refer to Table 1. Calculate the value of X. Explain two methods that PC could use to improve its cash flow. Analyse one advantage and one disadvantage to PC of purchasing the computerised inventory management system. Evaluate Paul’s decision to set up PC as a sole trader.
9609_m18_qp_22
THEORY
2018
Paper 2, Variant 2
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Wood’s Logs (WL) WL was set up by Robert Wood 50 years ago. It is a private limited company with all of the shares owned by the Wood family. Robert has managed the business since it began and he is well liked as the figurehead of the business. WL cuts down trees and processes them into logs. The logs are loaded onto trucks and trains for delivery to customers. All of WL’s logs are sold in industrial markets. WL is a labour intensive business which has over 100 employees. Demand for logs is seasonal. WL maintains a steady rate of production but the business cannot afford to hold high levels of inventory. Table 1.1 shows a cash flow forecast for the next three months. Table 1.1: Cash flow forecast for WL Month 1 ($000) Month 2 ($000) Month 3 ($000) Cash Inflows Revenue Total cash in Cash Outflows Labour Inventory storage Expenses Total cash out Opening balance Closing balance The workforce is currently demotivated. Employees receive a basic wage and a share of the profits. In the last four years, profits have been falling and the company is struggling to break even. The demand for logs is decreasing, as businesses use more recycled products. WL does not have any environmental targets and this has also reduced demand. Robert is now 70 years old and wants to stop managing WL. His grandson, Brad, is keen to become the new Managing Director. Brad went to university and studied Mintzberg’s management roles. He believes that he has all the skills needed to become the next Managing Director of WL. Define the term ‘break even’ (line 24). Explain the term ‘industrial markets’ (line 5). Refer to Table 1.1. Calculate the new closing balance for Month 3 if the inventory storage costs for each month increase by 20%. Explain one benefit for WL of holding inventory. Analyse two factors which may have affected the location of WL. Recommend which of Mintzberg’s management roles is likely to be the most important for the new Managing Director of WL. Justify your recommendation.
9609_s19_qp_21
THEORY
2019
Paper 2, Variant 1
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First Nature (FN) FN is a co-operative farm producing milk, beef and vegetables. Products are sold in its shop and at local farmers’ markets. FN’s mission statement is in . The sustainable production of food, to build strong relationships with members and customers and to contribute to the local community : FN’s mission statement The co-operative has 20 members who work on the farm, in the shop and at the markets. Over the past 10 years FN has built up a loyal customer base. Recently, a neighbouring farm has become available to purchase for $80 000. FN has limited capital but would like to expand by purchasing the neighbouring farm. FN is considering sources of finance for the capital needed to buy the land. Giuseppe is one of the original members of the co-operative and has accounting skills. He has prepared the cash flow forecast shown in Table 1.1 in the business plan for the neighbouring farm. Table 1.1: Cash flow forecast for the neighbouring farm Quarter 1 ($000) Quarter 2 ($000) Quarter 3 ($000) Quarter 4 ($000) Cash Inflows Revenue Total cash in Cash Outflows Set-up costs Equipment Training Total cash out Opening balance (130) (140) (100) Closing balance (130) (140) (100) X FN will use the neighbouring farm to develop educational programmes for local schools and for putting on community events. The 20 members of the co-operative already work very long hours. The members are discussing whether they should allow more members or become a public limited company and employ the extra workers required. To become a public limited company would require the agreement of all 20 members. Some members are in favour of the change to a public limited company as they would become quite wealthy through selling shares. However, other members feel that it would change the relationship with its customers. Define the term ‘mission statement’ (line 2). Explain the term ‘co-operative’ (line 1). Refer to Table 1.1. Calculate the value of X in quarter 4. Explain two benefits to FN of cash flow forecasting. Analyse two sources of finance, other than selling shares, FN could use to purchase the neighbouring farm. Evaluate the likely impacts on the local community if FN changes from a co-operative to a public limited company.
9609_s19_qp_23
THEORY
2019
Paper 2, Variant 3
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Priya’s Bookshop (PB) Priya lives in town R which is situated in beautiful countryside with nice walks nearby. Many tourists visit town R. The town’s council would like town R to become branded as a ‘booktown’, a town with many bookshops selling new and used books. The council announced a new financial scheme offering grants to attract entrepreneurs willing to open a bookshop. Priya applied for a grant to start up Priya’s Bookshop (PB). Part of her grant application included a cash flow forecast, shown in Table 1.1. Table 1.1: Cash flow forecast, first three months of trading ($000) Month 1 Month 2 Month 3 Cash in: Owner’s capital Grant Revenue Cash out: Initial set up costs Utilities (power, water etc) Employee costs Purchases Marketing Opening balance –1 Closing balance –1 X Priya’s grant application was successful and she opened PB well aware of the need for both cash and profit. Priya now wants to raise awareness of PB in town R. Priya did some market research and decided to use market segmentation. This will help her to decide on the promotional methods she could use for her bookshop. See Table 1.2. Table 1.2: Age and gender of residents in town R Age group Percentage of residents in age group Percentage of age group who are female 0–15 19% 50% 16–64 63% 55% 65+ 18% 60% Define the term ‘market segmentation’ (line 25). Explain the difference between cash and profit (line 23). Refer to Table 1.1. Calculate PB’s forecast closing balance in month 3 (. Analyse two benefits to Priya of producing a cash flow forecast. Explain two entrepreneurial qualities that Priya has shown. Recommend suitable promotional methods that Priya could use to raise awareness of PB in town R. Justify your recommendation.
9609_s22_qp_21
THEORY
2022
Paper 2, Variant 1
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Office Furniture Designs (OFD) Markus is an entrepreneur and is planning to set up a private limited company called OFD in four weeks’ time. OFD will be an online retailer selling office furniture directly to business customers. Products will be sent directly to customers from OFD’s warehouse. OFD’s product range will include office chairs, desks and filing cabinets. Markus will have limited start-up funds. OFD will operate in a competitive market and Markus is keen to offer high-quality customer service. He also will have to think carefully about opportunity cost. As part of his business planning, Markus has prepared a cash flow forecast (see Table 1.1). Table 1.1 OFD’s cash flow forecast June – August 2023 ($ 000) June July August Cash inflow Cash sales Credit sales Total inflow Cash outflow Supplies Utilities Rent Salaries Operating expenses Total outflow Net cash flow (50) (41) Opening balance (40) Closing balance (40) (81) 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. Identify one quality an entrepreneur needs for success. Explain the term opportunity cost. Refer to Table 1.1. Calculate the forecast closing balance for August 2023. Explain one factor that will influence Markus’ choice of a source of finance. Analyse two benefits to OFD of offering induction training to all employees. Evaluate whether Markus needs accurate cost information before setting up OFD.
9609_s23_qp_22
THEORY
2023
Paper 2, Variant 2
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Fire Fly Ebooks (FFE) FFE is a manufacturer of electronic book readers (e-readers). The product is used to read electronic books which are sold by other businesses. FFE’s product is a simple and inexpensive e-reader with a retail price of between $20 and $30. FFE sells each e-reader to retailers for $10. There are many competitors in the market and FFE has calculated the price elasticity of demand to be very elastic. There are similar products on the market and FFE must try to maintain a Unique Selling Point (USP) for its product. In the past the USP has been its low price; but, as more brands become available, extra features have become more important. These features include: built-in lights, speakers for audio books and voice control to change page. FFE does not currently offer any extra features in its product. FFE has received an order from a new retailer. This order is to be delivered in Month 2. The retailer wants two months to pay in Month 4, so that it has chance to sell the e-readers before paying FFE. This might cause FFE cash flow problems. FFE has produced a cash flow forecast which includes the new order. Table 2: Cash flow forecast for FFE Month 1 ($) Month 2 ($) Month 3 ($) Month 4 ($) Cash inflows: Cash sales 10 000 10 000 10 000 10 000 Trade receivables 2 000 2 000 2 000 15 000 Total cash in 12 000 12 000 12 000 25 000 Cash outflows: Factory rent 2 000 2 000 2 000 2 000 Cost of sales 8 000 16 000 8 000 8 000 Insurance* 12 000 Electricity** 3 000 3 000 Total cash out 25 000 18 000 10 000 13 000 Opening balance 10 000 (3 000) (9 000) (7 000) Closing balance (3 000) (9 000) (7 000) Z *Insurance is paid once a year **Electricity is paid once a quarter (every three months) Define the term ‘brand’ (line 8). Briefly explain the term ‘price elasticity of demand’ (lines 5–6). Refer to Table 2. Calculate the value of Z. Explain two advantages to FFE of accepting the order from the new retailer. Analyse the importance of two elements of the marketing mix to FFE. Discuss how FFE could improve its forecast cash flow.
9609_w16_qp_22
THEORY
2016
Paper 2, Variant 2
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Questions Discovered
18