Explain how better management of trade receivables and trade payables can improve cash flow.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2020). The mark or mark type is shown in brackets.

1. [1] Descriptive information about trade receivables (debtors who have bought goods on credit, shown on the statement of financial position as current assets), trade payables (accounts payable or creditors, shown as current liabilities for goods/services bought on account), or cash flow (sum of cash payments to a business (inflows) less the sum of cash payments (outflows)).
2. [2-3] Explanation of how better management of trade receivables and/or trade payables can improve cash flow.
3. [4-5] Effective explanation of how better management of both trade receivables and trade payables can improve cash flow. This includes points like: If credit control encourages trade receivables to pay for their goods and services more promptly this will bring money into the business more quickly and so improve cash inflow, therefore improving overall cash flow. If a business can delay the payment of its trade payables this will keep money in the business for longer, reducing cash outflow, therefore improving overall cash flow. The more goods the house builder can buy on credit the more they can delay the payment of trade payables until after payment of trade receivables. This will reduce cash outflows and improve the overall cash flow. Accept debt factoring as a management method. Accept keeping of good records as better management. Accept any other valid response.