5.2 Cash Flow Forecast (Cambridge International IGCSE Business): Exam Questions

Define‘opening balance’

[case-study] Kemala makes high-quality beauty products. Demand for her best-selling hand cream is price inelastic. She advertises her products in specialist beauty magazines. Kemala is analysing her income statement. An extract is shown in the below table. She said: ‘When I started my business, I did not understand why cash is important’.

Extract from Kemala’s income statement 2021 ($000)
Revenue	480
Gross profit	192
Profit for the year	72

Outline two reasons why cash is important for Kemala’s business.

Identify two reasons why a business might have cash-flow problems.

State four reasons why a business might have cash flow problems.

[case-study] LMA is a family-owned restaurant. The business was started 20 years ago and has remained small. LMA is a partnership. The partners are considering whether LMA should become a private limited company. The Finance Manager is analysing LMA’s cash-flow forecast. An extract is shown in Table 2.1.

Table 2.1 : Extract from LMA’s cash-flow forecast 2023 ($000)

	July	August	September
Cash inflow	420	300	330
Cash outflow	410	320	360
Net cash flow	X	(20)	(30)
Opening balance	60	70	50
Closing balance	70	50	Y

Calculate X and Y.

Show your working.

Identify four examples of a cash inflow.

Define'net cash flow'

[case-study] Veronique is bored with her work in a large factory. As a creative person, she would like to leave and start up a flower shop. Veronique has asked about micro-finance and prepared a cash flow forecast. An extract is shown in the below table. Veronique has also carried out some market research and found out that the demand for flowers is likely to be high during festivals. She thinks she has the right characteristics to be a successful entrepreneur.

Extract from the cash flow forecast for Veronique’s flower shop for the first 3 months ($)
	Month 1	Month 2	Month 3
Cash in	500	1 200	2 000
Cash out	1 500	1 400	1 200
Net cash flow	(1 000)	(200)	800
Opening balance	0	(1 000)	(1 200)
Closing balance	(1 000)	(1 200)	(400)

Veronique now thinks that the cash inflow in month 3 will be $1,500. Calculate the

• New net cash flow in month 3
• New closing balance in month 3

Define'insolvency'

[case-study] BikeFix is a mobile bicycle repair service in a large city. Demand is higher in spring and summer. The owner wants to buy an electric van to reach more customers at weekends. BikeFix currently advertises with leaflets and social media. The owner is considering dynamic pricing (higher prices at peak times). Two finance options are being considered: a bank loan or leasing the van.

Table 2.1 – Extract from BikeFix cash flow forecast (first quarter) $s

	January	February	March
Opening balance	2 000	3 500	2 800
Cash inflows (sales)	6 000	5 400	7 200
Cash outflows (wages, fuel, parts, ads)	4 500	6 100	5 900
Net cash flow	1 500	X	1 300
Closing balance	3 500	2 800	Y

Define cash flow forecast.

Extract:

BikeFix is a mobile bicycle repair service in a large city. Demand is higher in spring and summer. The owner wants to buy an electric van to reach more customers at weekends. BikeFix currently advertises with leaflets and social media. The owner is considering dynamic pricing (higher prices at peak times). Two finance options are being considered: a bank loan or leasing the van.

Table 2.1 – Extract from BikeFix cash flow forecast (first quarter) $s

Calculate X and Y.

[case-study] NPX is an online retail business. All orders are sent directly to customers from its warehouse. NPX employs 60 full-time workers. The Operations Manager is analysing NPX’s cash-flow forecast. An extract is shown in Table 2.1. To improve productivity, the manager plans to introduce new technology that can select and pack all the items for each order. This will make 35 workers redundant. The technology will cost $40,000. The manager is considering using either internal sources or external sources to finance this technology.

Table 2.1: NPX’s cash-flow forecast for the period July – September 2021 ($000)

	July	August	September
Cash inflows	100	120	140
Cash outflows	90	90	110
Net cash flow	10	30	30
Opening balance	5	15	45
Closing balance	15	45	75

Explain two possible effects on NPX’s cash-flow forecast of introducing the new technology.

Extract:

Soapy Sudds Manufacturer (SSM)

SSM is a public limited company that was set up 25 years ago. SSM manufacture soap powder in country Y. The soap powder is used for washing clothes. SSM sells all its soap powder to large retailers in country Y. SSM’s sales have been increasing for many years in country Y but sales in the last year have remained the same. The directors of SSM are considering ways to increase sales.

SSM has a total of 100 employees with 60 in the Operations Department. It uses flow production in the factory and has 10 production lines with 5 workers and 1 supervisor for each line. The Operations Manager is aware that production workers are unhappy and often complain about their jobs being boring. These workers have always been paid by an hourly rate. The Human Resources Manager has recommended changes to ensure fewer workers leave each year to work for other businesses.

The directors of SSM have decided to expand the factory. They will need $15m to do this. The directors have also considered taking over a competitor. SSM is likely to benefit from economies of scale as it grows.

The Marketing Director thinks SSM should start selling soap powder in markets in other countries. SSM will need to carry out either primary market research or secondary market research to forecast the potential total sales in these new markets. There are many existing manufacturers in these countries. SSM need to consider the problems when entering new markets in other countries such as tariffs or quotas.

Appendix 1

Manufacturing process to make soap powder

All the different types of soap powder are manufactured on production lines using flow production. SSM makes use of specialisation.

Each production line has the following stages:

Each of these stages uses machinery controlled by a production worker

Appendix 2

Email from the SSM Finance Director to the Managing Director

SSM has a cash-flow problem which may get worse. Please see charts below

Appendix 3

Newspaper article from Main News 1 October 2021

Retailers have reported increased sales for most types of products such as sales of washing machines which have increased by 15%. Economic growth in country Y is predicted to increase.

Many businesses have been recruiting additional employees and there are now shortages of some skilled workers. The government in country Y has recorded an increase in inflation to 8% so far this year, which is a worry.

Explain two ways SSM’s cash-flow problems could be overcome.

Refer to the following insert when answering the question.

Extract:

Everyone Theatre (ET)

Zane and Zaara are both actors. They plan to start up a theatre in a low-income area of Main City. Zane and Zaara believe that helping the community is as important as being successful entrepreneurs.

The theatre will be a private sector business and Zane and Zaara have to decide whether to start up as an unincorporated business (partnership) or as a limited company. Zane is planning to prepare a cash-flow forecast for the first year. Zaara knows they will need to set business objectives for the theatre and also decide on a leadership style to use when managing employees. ET will have 24 part-time employees as shown in the organisational chart in Appendix 1.

Zane and Zaara plan to put on performances in the evenings for local people and tourists. There will be 100 seats in the theatre but not all the seats will be sold if the price is too high. The Marketing Manager, Zaara, will need to decide which performances to put on, what price to charge and which refreshments to sell. Zaara will also need to decide between the two possible options for the first performance when the theatre opens. Information on the two options is shown in Appendix 2.

In the daytime the theatre building will be used by Daycare, a local social enterprise. Daycare takes care of young children up to the age of 5 so that low-income family members can go out to work. It also provides education for the children which helps their development and progress before they start school. Some of Daycare’s objectives are different to those of ET

Appendix 1

Proposed organisational chart for the theatre

Note: The numbers in brackets are the number of part-time employees who work in each department

Appendix 2

Forecast data for the two possible options for ET’s first performance at the theatre

Appendix 3

Email from Zane to Zaara

To: Zaara

From: Zane

Date: 1 April 2023

We want to support the local community and we need to make decisions about the following.

Should we:

• Pay fair wages even though they may be higher than those paid by competing theatres?
• Only buy costumes produced in the local community?
• Purchase all refreshments from suppliers that do not pollute the environment?

Explain four reasons why it is important that Zane prepares a cash-flow forecast before starting ET.

Refer to the following insert when answering the question.

[case-study] Tech Flow Solutions is a software development company that creates mobile applications for small businesses. The company has 45 full-time employees working from a modern office building. TechFlow's Finance Director is reviewing the company's cash-flow forecast for the next quarter. An extract is shown in Table 2.1. The company has recently signed several large contracts that require significant upfront investment in new software licences and additional server capacity. These contracts will generate substantial revenue, but payments from clients are typically received 90 days after project completion. TechFlow is also planning to expand its workforce by hiring 20 new developers to meet increased demand.

Table 2.1: TechFlow's cash-flow forecast for the period October – December 2024 (£000)

	October	November	December
Cash inflows	85	95	125
Cash outflows	110	130	140
Net cash flow	(25)	(35)	(15)
Opening balance	20	(5)	(40)
Closing balance	(5)	(40)	(55)

Explain two possible cash flow problems that TechFlow Solutions may face based on the forecast.

Do you think cash flow forecasts always aid managers' decision-making? Justify your answer.

Extract:

HomeHardware Plus (HHP)

HomeHardware Plus (HHP) is a chain of 50 hardware stores in Country X. It is a private limited company that has been operating for 25 years. HHP sells a wide range of DIY products, tools, and building materials to both individual customers and small construction businesses. The company has a centralized warehouse that supplies all its stores.

HHP has been facing increasing competition from online retailers. Its sales have declined by 10% over the past two years, and profits have fallen from $5 million to $3 million. The Finance Director has prepared a cash flow forecast for the next six months, which shows that HHP may face liquidity problems in the near future (see Appendix 1).

To address these challenges, HHP is considering launching its own e-commerce website. This would require an initial investment of $2 million for website development, additional inventory, and staff training. The Marketing Director estimates that online sales could reach $500,000 per month within the first year.

HHP's Human Resources Director believes that the company's 500 employees need to improve their customer service skills to compete effectively with online retailers. She has proposed a comprehensive training program that would cost $200,000.

The company is also exploring the possibility of expanding into neighbouring Country Y, where the construction industry is booming. However, Country Y has recently introduced import quotas on building materials, which could affect HHP's supply chain.

Appendix 1: Extract from HHP's projected monthly cash flow forecast (in $000s)

Consider how the following three changes in HHP's cash flow forecast might affect the business.

• A 20% increase in monthly cash inflows
• A 15% decrease in monthly cash outflows
• A $1 million injection of capital in July

Which change would have the greatest impact on HHP's working capital? Justify your answer.

Refer to the following insert when answering the question

Extract:

Heartfelt Greetings Ltd (HGL)

Heartfelt Greetings Ltd (HGL) is a private limited company that designs and manufactures greetings cards in Country Y. Established 15 years ago, HGL has become known for its high-quality, hand-finished cards. The company employs 50 people and had sales revenue of $5 million last year, with a profit of $750,000.

HGL's cards are sold through independent gift shops and some national retail chains in Country Y. The company is considering expanding its operations to sell cards in neighbouring countries. To do this, HGL would need to increase its production capacity and invest in new printing technology.

The greetings card market in Country Y is becoming increasingly competitive. Many customers are switching to digital cards or using social media to send greetings, which has led to a 10% decline in physical card sales over the past two years. Additionally, the cost of raw materials, particularly high-quality paper, has increased by 15% in the last year due to supply chain disruptions.

HGL's Finance Director has prepared a cash flow forecast for the next six months (see Appendix 1). The forecast shows that while the business currently has a positive cash balance, it may face cash flow problems if it proceeds with its expansion plans without careful financial management.

The Managing Director is considering two options to finance the expansion:

1. Take out a long-term bank loan of $2 million
2. Sell 25% of the company's shares to a venture capital firm

Appendix 1: Six-month cash flow forecast for HGL (in $000s)

Consider how the following three changes in HGL's cash flow forecast could affect the business.

• Increase cash inflows by $100,000 per month
• Reduce cash outflows by $75,000 per month
• Arrange an overdraft facility of $200,000

Which change would have the greatest impact on HGL's working capital? Justify your answer.

Refer to the following insert when answering the question