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(i) Outline two reasons why a household should prepare a cash flow forecast - Leaving Cert Business - Question C - 2013
Question C
(i) Outline two reasons why a household should prepare a cash flow forecast. (ii) Illustrate how a household can overcome cash flow problems.
Worked Solution & Example Answer:(i) Outline two reasons why a household should prepare a cash flow forecast - Leaving Cert Business - Question C - 2013
Step 1
Outline two reasons why a household should prepare a cash flow forecast.
Answer
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Effective Financial Management: Preparing a cash flow forecast enables households to manage their cash flow effectively and live within their means. It acts as a control mechanism to compare actual cash flow against planned cash flow, encouraging better financial planning.
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Identifying Surplus and Deficit Periods: A cash flow forecast helps identify future periods where the household may experience a cash shortfall (deficit) or surplus. This foresight allows for corrective actions to manage any anticipated deficits and enables the household to plan for savings or investments when surplus cash is available.
Step 2
Illustrate how a household can overcome cash flow problems.
Answer
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Targeting Discretionary Expenditure: The household can reduce its cash outflows by targeting discretionary spending, such as cutting back on entertainment and holidays.
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Increasing Income Levels: The household can attempt to increase its income by involving family members in work. This might include a non-working family member taking up employment or even a household member getting a second job.
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Arranging an Overdraft Facility: The household might consider setting up a bank overdraft facility to manage finances during tight cash flow months. Financial providers often offer this service, though it should be used judiciously.
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Utilizing Once-off Annual Expenditure: Households can plan for once-off expenditures by spreading costs over the year. This means it’s easier to manage seasonal expenses like insurance or school fees.
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Deferring Bill Payments: If there's a cash flow issue, the household can renegotiate due dates with billers, ensuring that the essential payments are made timely, avoiding penalties or disconnection.
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Seeking Financial Advice: Lastly, consulting with a financial advisor or a credit union can help provide strategies to manage cash flow issues effectively.