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The Business Cash Flow Forecast of Irish Garden Furniture Ltd - Leaving Cert Business - Question C - 2002
Question C
The Business Cash Flow Forecast of Irish Garden Furniture Ltd. is set out below: Receipts € Payments € Net Cash € Opening Cash €... show full transcript
Worked Solution & Example Answer:The Business Cash Flow Forecast of Irish Garden Furniture Ltd - Leaving Cert Business - Question C - 2002
Step 1
Outline two reasons why Irish Garden Furniture Ltd. prepared the above Cash Flow Forecast.
Answer
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To Manage Liquidity: The primary reason for preparing a cash flow forecast is to ensure that the business maintains sufficient liquidity to meet its liabilities as they fall due. It helps Irish Garden Furniture Ltd. to analyze cash inflows and outflows to avoid scenarios where they would be unable to pay suppliers or meet other obligations.
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To Plan Future Financial Needs: The cash flow forecast allows the business to identify periods of cash surplus or deficit, enabling management to make informed decisions about borrowing or investing surplus funds. This planning is essential for long-term sustainability.
Step 2
Analyse the Cash Flow Forecast. Explain, and offer solutions to, any problems you think the business may have.
Answer
The cash flow forecast reveals several critical aspects of Irish Garden Furniture Ltd.’s financial health:
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Net Cash Position: In July, there is a negative net cash of €(12,000), indicating a potential liquidity issue. The negative net cash in the first month suggests an immediate need to either increase revenue or reduce costs.
- Solution: Improve collection of receivables and possibly offer discounts for early payments to enhance cash inflow.
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August Cash Flow Trends: Although cash improves in August to €2,750, it remains tight and still indicates potential cash flow problems.
- Solution: Re-evaluating the payment terms with suppliers could help in managing cash outflows better.
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September Projections: The forecast for September shows a positive net cash figure of €9,650, which indicates stabilization. However, the previous months suggest volatility in cash flows that could arise due to seasonal fluctuations.
- Solution: Implement a more stringent budgeting process and conduct regular cash flow reviews to anticipate shortfalls and prepare accordingly.