Cash Flow Forecasting and Solutions

What tool would you use to predict future cash inflows and outflows of your club?

• The crystal ball of profitability to determine the club's success

• The enchanted scroll of cash flow forecast to predict future cash movements

• The mystical ledger to calculate the club's net worth

• The magic mirror to assess the club's market value

Answer explanation

The primary purpose of a cash flow forecast is to predict the future cash inflows and outflows of a business, helping management plan for financial needs and ensure liquidity.

Which technique might Evie and Thomas use to forecast their lemonade stand's cash flow?

• Linear regression analysis

• Break-even analysis

• Discounted cash flow analysis

• Historical trend analysis

Answer explanation

Historical trend analysis is commonly used in cash flow forecasting as it examines past financial data to predict future cash flows, making it a reliable technique for forecasting.

Which of the following is an operating activity?

• Sale of equipment

• Payment of dividends

• Collection of accounts receivable

• Issuance of shares

Answer explanation

The collection of accounts receivable is an operating activity as it relates to the core business operations of generating revenue. In contrast, the other options pertain to investing or financing activities.

What could be a consequence of a negative cash flow forecast?

• Increased profitability

• Improved credit rating

• Inability to meet financial obligations

• Higher stock prices

Answer explanation

A negative cash flow forecast indicates that a company may not have enough cash to cover its expenses, leading to the inability to meet financial obligations. This can result in missed payments and potential insolvency.

Which indicates a cash flow issue?

• Consistent positive cash flow

• Increasing cash reserves

• Frequent need for short-term borrowing

• High levels of retained earnings

Answer explanation

A frequent need for short-term borrowing indicates that a business is struggling to meet its immediate cash obligations, signaling a cash flow issue. In contrast, positive cash flow and increasing reserves suggest financial stability.

What is one solution Kiara and Arthur could use to solve their cash flow problem at their lemonade stand?

• Increase inventory levels

• Delay payments to suppliers

• Reduce sales prices

• Increase dividend payments

Answer explanation

Delaying payments to suppliers allows a business to retain cash longer, improving cash flow. This strategy helps manage short-term financial needs without affecting inventory or sales prices.

Which strategy would you use for long-term cash flow planning?

• Offering discounts for early payments

• Securing a long-term loan

• Reducing staff salaries

• Increasing advertising expenditure

Answer explanation

Securing a long-term loan is a long-term cash flow planning strategy as it provides sustained funding over time, allowing for better financial management and planning compared to the other options, which are more short-term in nature.

What does a high accounts receivable turnover mean for cash flow?

• It indicates slow collection of receivables

• It suggests efficient cash collection

• It leads to increased cash outflows

• It results in higher inventory levels

Answer explanation

A high accounts receivable turnover indicates that a company is efficiently collecting its receivables, leading to improved cash flow. This means cash is being collected quickly, enhancing liquidity.

Which of the following is NOT typically included in a cash flow forecast?

• Expected sales revenue

• Projected tax payments

• Depreciation expenses

• Anticipated loan repayments

Answer explanation

Depreciation expenses are a non-cash item and do not affect cash flow directly, making them typically excluded from cash flow forecasts. In contrast, expected sales revenue, tax payments, and loan repayments are cash-related.

What strategy should Evie and Sophie use to improve cash flow?

• Increase credit terms for customers

• Reduce inventory turnover

• Negotiate better payment terms with suppliers

• Increase capital expenditure

Answer explanation

Negotiating better payment terms with suppliers allows a business to delay cash outflows, improving cash flow. This strategy helps maintain liquidity, unlike increasing credit terms or reducing inventory turnover, which can strain cash flow.