Photo AI
Evaluate these two options and recommend which one Pura Cosmetics could use to manage 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 manage its cash-flow more effectively. Pura Cosmetics has set the objective of managi... show full transcript
Worked Solution & Example Answer:Evaluate these two options and recommend which one Pura Cosmetics could use to manage 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 heightened output may necessitate a larger factory and additional raw materials, which could lead to significant cash outflows. An overdraft facility could provide Pura Cosmetics with the necessary additional working capital to manage these cash outflows effectively.
Looking at the cash flow forecast for December, where a negative cash flow of £3,800 is projected, having an overdraft may help the company maintain operations without damaging relationships with retailers. By accessing this facility, they could avert the potential pitfalls of over-trading.
Step 2
Option 2 - reducing the credit period to its customers
Answer
Currently, Pura Cosmetics offers a 30-day credit period to retailers. By reducing this credit period, retailers would receive payment more quickly, which could positively impact cash inflows for Pura Cosmetics.
If the trade credit period were reduced, the business could avoid the anticipated negative cash flow of £63,000 in January, thus potentially reducing interest costs associated with the overdraft. However, Pura needs to consider how retailers might perceive this change, as it could strain relationships due to tightened cash flows on their end.
Step 3
Recommendation
Answer
Both options present viable avenues for managing cash flow, but increasing the overdraft facility may be more immediately beneficial. It provides flexibility for unexpected costs and allows Pura to meet its production goals without compromising supplier relationships. Reducing the credit period could be considered a secondary option, but it may risk straining retailer relations and may not yield immediate cash flow benefits. Therefore, focusing on securing a more substantial overdraft facility is recommended for Pura Cosmetics’ rapid expansion.