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Evaluate these two options and recommend which one Pura Cosmetics could use to improve the effectiveness of managing its cash-flow more effectively. - Edexcel - A-Level Business - Question 1 - 2022 - Paper 2
Question 1
Evaluate these two options and recommend which one Pura Cosmetics could use to improve the effectiveness of managing its cash-flow more effectively.
Worked Solution & Example Answer:Evaluate these two options and recommend which one Pura Cosmetics could use to improve the effectiveness of managing its cash-flow more effectively. - Edexcel - A-Level Business - Question 1 - 2022 - Paper 2
Step 1
Option 1 - overdraft facility
Answer
Pura Cosmetics aims to rapidly expand by increasing output to 15,000 units per month. This growth could lead to significant cash outflows as the company needs to rent a larger factory, acquire more raw materials, and hire additional staff. An overdraft facility could provide the necessary working capital to cover these increased outflows, aiding in cash management. In December, the forecast shows a negative cash flow of £3,800; thus, an overdraft could enable smoother operations and avoid damaging relationships with retailers by ensuring timely payments.
Step 2
Option 2 - reducing the credit period to its customers
Answer
Currently, Pura Cosmetics extends 30 days of credit to retailers. By reducing this credit period, the business could accelerate cash inflows, improving net cash flow. A projected cash flow inflow of £63,000 could be realized sooner, thereby helping the company avoid potential overdraft issues. However, it's important to consider that smaller retailers might struggle with shorter credit terms, potentially affecting the company's sales volume. The option presents minimal risk compared to the overdraft approach.
Step 3
Recommendation
Answer
While both options could help manage cash flow effectively, I recommend that Pura Cosmetics should pursue the overdraft facility. This option not only provides flexibility to manage production and operational challenges, but it also allows the company to focus on rapid expansion without risking jeopardizing relationships with their retailers through tighter credit terms. The overdraft ensures adequate resources to address urgent financial needs and supports growth initiatives efficiently.