Page 264 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 5 Financial information and decisions

Financing a short-term cash shortage

There are several ways a business can overcome a short-term cash-fl ow problem.
It can:
TOP TIP ■ ask trade receivables to pay more for goods more quickly by offering discounts to

You will need to know the customers who have been sold goods on credit
reasons for cash-flow problems
■ negotiate longer credit terms with suppliers
and how a business might
overcome them. ■ delay the purchase of non-current assets until the cash flow improves
■ find other sources of finance for the purchase of non-current assets.

ACTIVITY 20.3

The following cash-flow forecast has been prepared for the next four months for AGO.

Month 1 Month 2 Month 3 Month 4
$000 $000 $000 $000
Cash inflow

Receipts 35 42 36 47
Total inflow 35 42 36 43
Cash outflows

Payments 33 46 53 35
262
Total outflow 33 46 53 35
Net cash flow 2 (−4) (−17) 8

Opening balance 11 13 9 (−8)
Closing balance 13 9 (−8) 0

Having discussed the cash-flow forecast the management of AGO plan to take the following actions:

■ Offer an early payment discount to some of their most important customers. They expect that this will improve the

inflow from by $1,000 in months 1 and 2 and by $2,000 in months 3 and 4.
■ In month 3 they were planning to replace one of their delivery vehicles with a newer model. They have decided to look at
other ways of financing this purchase. They are considering leasing the vehicle instead of an outright cash purchase. This
will reduce cash outflows in month 3 by $8,000, but increase the outflow in month 4 by $2,000, when the first quarter
lease payment will be due.
1 Use the information above to amend AGO’s cash-flow forecast.
2 Comment on your amended cash-flow forecast.
3 Do you think the management of AGO were right to use a lease to finance the new delivery vehicle?
Justify your answer.

TEST YOURSELF
1 Explain why cash is important to a business.
2 Why is it important for a business to forecast its cash flow?
3 How might a business finance a short-term cash shortage?