5.4 Cash Flow and Profit (AQA A Level Business): Flashcards
Exam code: 7132
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Name two ways to improve cash flow.
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Cards in this collection (15)
Name two ways to improve cash flow.
Reduce customer credit, extend supplier payment, use an overdraft, sell excess inventory, or introduce new capital (any two).
Why might reducing the credit period offered to customers help cash flow?
It increases current assets by collecting money faster — but customers may switch to rivals with better terms.
Holding too much cash has an opportunity cost, especially when interest rates are .
Holding too much cash has an opportunity cost, especially when interest rates are high.
Name two ways to improve profits and profitability.
Raise prices, reduce variable costs, reduce other expenses, and cut one-off costs and interest charges (any two).
Why must a business understand price elasticity of demand before raising prices?
If demand is price elastic, a price rise reduces revenue and profitability; if inelastic, it increases them.
How can reducing variable costs improve profitability?
By buying cheaper resources, negotiating with suppliers or bulk-buying — but quality must not suffer.
Give one risk of reducing staffing levels to cut expenses.
It can harm staff morale and reduce productivity.
Leasing equipment reduces one-off purchase costs, but the business never the assets, weakening its balance sheet.
Leasing equipment reduces one-off purchase costs, but the business never owns the assets, weakening its balance sheet.
Give one difficulty in improving cash flow.
Late-paying customers, cash tied up in unsold inventory, overtrading, and seasonal demand swings.
Define overtrading.
Overtrading is expanding too fast — laying out cash up-front for new sites/staff before the extra sales arrive, leaving a funding gap.
Give one difficulty in improving profit.
Rising raw-material/energy costs, price wars, high fixed costs when demand falls, and unfavourable exchange rates.
A seasonal business earns most of its revenue in part of the year but pays regular bills monthly, so cash runs low in the -season.
A seasonal business earns most of its revenue in part of the year but pays regular bills monthly, so cash runs low in the off-season.
True or False?
Selling off excess inventory converts less liquid assets into cash.
True.
Selling excess inventory turns less liquid current assets into cash and can cut storage costs.
True or False?
Raising prices always increases a business's profit.
False.
If demand is price elastic, a price rise reduces revenue and profitability.
True or False?
High fixed costs make profit margins collapse when sales fall.
True.
Fixed costs stay the same, so when sales fall they're spread over fewer units, shrinking the margin.
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