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Balden Ltd prepared the following cash flow forecast : 2007 | Receipts | Payments | Net Cash | Opening Cash | Closing Cash | | ------------ | ------------- | -------------- | --------------| --------------| | €70,000 | €80,000 | (€10,000) | €3,000 | (€7,000) | | €55,000 | €45,000 | €10,000 | (€7,000) | €3,000 | | €80,000 | €55,000 | €25,000 | €3,000 | €28,000 | | Total | €205,000 | €180,000 | €25,000 | | (i) Why would this cash flow forecast be prepared by Balden Ltd? (ii) How might management deal with the financial issue highlighted in this forecast? - Leaving Cert Business - Question B - 2007
Question B
Balden Ltd prepared the following cash flow forecast : 2007 | Receipts | Payments | Net Cash | Opening Cash | Closing Cash | | ------------ | ----... show full transcript
Worked Solution & Example Answer:Balden Ltd prepared the following cash flow forecast : 2007 | Receipts | Payments | Net Cash | Opening Cash | Closing Cash | | ------------ | ------------- | -------------- | --------------| --------------| | €70,000 | €80,000 | (€10,000) | €3,000 | (€7,000) | | €55,000 | €45,000 | €10,000 | (€7,000) | €3,000 | | €80,000 | €55,000 | €25,000 | €3,000 | €28,000 | | Total | €205,000 | €180,000 | €25,000 | | (i) Why would this cash flow forecast be prepared by Balden Ltd? (ii) How might management deal with the financial issue highlighted in this forecast? - Leaving Cert Business - Question B - 2007
Step 1
Why would this cash flow forecast be prepared by Balden Ltd?
Answer
The cash flow forecast would be prepared by Balden Ltd for several reasons:
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Measure Expected Liquidity: The forecast helps in assessing the cash availability from July to September, enabling the company to understand its liquidity position.
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Identify Problem Areas/Periods: By analyzing the data, management can pinpoint specific months where cash outflows exceed inflows, indicating potential financial stress.
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Plan for Sources of Finance: The forecast allows management to plan for potential financing needs, whether through operational adjustments or external funding.
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Compare with Previous Forecasts: Management can compare the current forecast against past performances to identify trends and variance.
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Good Cash Management: Overall, this enables effective cash management, ensuring that the company can meet its obligations and invest appropriately in opportunities.
Step 2
How might management deal with the financial issue highlighted in this forecast?
Answer
The financial issue highlighted in the forecast is a net cash deficit of €10,000 for July. To manage this issue, the following actions may be taken:
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Increase Receipts: The company could implement strategies to increase cash inflows, such as accelerating the collection of outstanding debts from customers.
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Quicker Collection of Money from Debtors: Management might incentivize early payments or improve credit terms to enhance cash flow.
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Arrange Short-term Finance: If necessary, the company could look for short-term financing solutions, such as a bank overdraft, to cover immediate cash shortfalls.