Forecasting & Managing Cash Flows (Cambridge (CIE) A Level Business): Exam Questions

Priya’s Bookshop (PB)

Priya lives in town R which is situated in beautiful countryside with nice walks nearby. Many tourists visit town R.

The town’s council would like town R to become branded as a ‘booktown’, a town with many bookshops selling new and used books. The council announced a new financial scheme offering grants to attract entrepreneurs willing to open a bookshop.

Priya applied for a grant to start up Priya’s Bookshop (PB). Part of her grant application included a cash flow forecast, shown in Table 1.1.

Table 1.1: Cash flow forecast, first three months of trading ($000)

Priya’s grant application was successful and she opened PB well aware of the need for both cash and profit.

Priya now wants to raise awareness of PB in town R. Priya did some market research and decided to use market segmentation. This will help her to decide on the promotional methods she could use for her bookshop. See Table 1.2.

Table 1.2: Age and gender of residents in town R

Tin Mines (TM)

TM is a private limited company in the primary sector. Tin is found underground and is extracted by mining. TM operates seven mines in country C. There are several job roles at each mine including skilled engineers, managers and miners.

TM has recently discovered a new source of tin in a remote area of country C. TM has permission to develop a tin mine but will have to construct transport links. It will need new buildings such as offices, warehouses and employee housing. The Human Resources Director is developing a workforce plan to recruit miners and managers for the new mine.

TM’s Financial Director has produced a cash flow forecast for the new mine for the next five years. This is shown in Table 2.1.

Table 2.1: Cash flow forecast for the new mine ($m)

The remote area of country C where the new tin mine will be located has a high level of unemployment and average incomes are low. TM intends to recruit employees from the local area and buy resources from local suppliers, if they are available. The market for tin is likely to be affected by increased demand for electric vehicles. The batteries in electric vehicles contain tin. The government of country C believes that the tin mine will be of great benefit to both the local community and national economy. However, tin mining can result in pollution of local water supplies.

Ravi's Sportswear (RS)

Ravi founded RS in country J eight years ago. The business designs and sells sportswear and running shoes. RS employs 25 full-time staff and sells its products through its own website and a small number of selected sports retailers across country J.

Ravi has recently launched a new range of women's sportswear, targeting the growing women's fitness market in country J. He has invested heavily in digital promotion and influencer partnerships to promote the new range, which has led to high marketing expenditure in the first quarter of 2024.

RS currently uses on-the-job training to develop all new employees. Ravi is considering whether to switch to off-the-job training, which would be more expensive in the short term but would develop employees' skills more systematically.

Table 1.1: RS cash flow forecast (January–March 2024)

Selwyn

Selwyn manufactures mattresses in country D for furniture retailers. Its original cash flow forecast for the next four months is shown below.

Table 1: Selwyn original cash flow forecast ($000)

Two changes have since occurred:

• Selwyn's foam supplier has raised prices by 12%, increasing cash outflows by $9 000 every month from August onwards.

• Selwyn's largest retailer, which accounts for 35% of sales, has extended its payment terms from 30 to 60 days. This delays $49 000 of inflows from August into September, and the same each month thereafter.

The Finance Director, Toma Petrov, has been asked to amend the forecast.

Denholm Studios

Denholm Studios photographs school pupils in country M. It was started this year by two former teachers with no previous business experience. Its overdraft limit is $120 000 and it opens September with $60 000 in the bank.

Schools are photographed in September and October. Orders are printed and delivered in November. Schools pay Denholm Studios in December and January.

Table 1: Denholm Studios cash flow forecast ($000)

Outflows in September to November are mainly photographers' wages, travel and printing costs.

Ashwell

Ashwell manufactures bespoke joinery in country R for building contractors. It pays for timber on delivery, but its contractor customers pay 60 days after installation. Annual revenue is $1.3m and it spends around $520 000 a year on timber.

Table 1: Ashwell cash flow forecast ($000)

Three options have been proposed:

A - arrange a $60 000 overdraft. Arrangement fee $1 200, interest at 14%.

B - offer contractors a 2.5% discount for payment within 14 days. Around 60% are expected to take it.

C - delay payment to the timber supplier from 30 to 60 days. The supplier has agreed, but would withdraw the 4% bulk discount Ashwell currently receives.

The Finance Director, Ines Duarte, favours the overdraft as the simplest option. The Operations Director, Karl Weiss, warns that losing the timber discount would raise costs permanently.

Brightmoor Pools

Brightmoor Pools installs swimming pools in country F. Demand is highly seasonal, with most installations between April and August. It is considering buying a second excavator for $180 000 in February. Its overdraft limit is $150 000.

Table 1: Brightmoor Pools cash flow forecast ($000), including the excavator purchase

The forecast assumes:

• 48 installations, the same number as last year

• 70% of customers pay a 30% deposit on order, with the balance on completion

• no cancellations, although two customers cancelled after work had begun last year

• no weather delays, although three weeks were lost to rain last April

The Managing Director, Ros Ferreira, points out that the forecast recovers strongly from May, so the purchase is affordable.

The Finance Director, Dev Anand, notes that February's forecast balance of minus $142 000 leaves only $8 000 of headroom against the overdraft limit.