Sarah is the owner of a small business making children's toys. She sells her toys to retailers on 3 months' credit. She receives 1 month's credit from her suppliers. Her cash flow forecast for the start of 2015 is given below. Table 1 ($000) | | January | February | March | |---|---|---|---| | Cash inflow | 15 | 20 | 19 | | Cash outflows: | | | | | Purchases of stock | 12 | 10 | 14 | | Wages | X | 7 | 6 | | Other payments | 4 | 4 | 4 | | Total cash outflows | 22 | Y | 24 | | Net cash flow | (7) | (1) | (5) | | Opening balance | 10 | 3 | 2 | | Closing balance | 3 | 2 | (3) | Note: numbers in brackets are negative.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2014). The mark or mark type is shown in brackets.

1. [1] Application [2 × 1]: award 1 mark per correct answer
2. (X) $6000
3. (Y) $21000
4. Note: Answer should be in thousands but accept 6 and 21 as could insert answers into table
5. [2] Application [2 × 1]: award 1 mark for each relevant payment
6. Payments include: insurance, rates, rent, water, electricity / gas, interest payments, salaries
7. Accept any reasonable answer
8. [2] Knowledge [2 × 1] – award 1 mark for each reason
9. [2] Application [2 × 1] - award 1 mark for each relevant explanation in context
10. Points might include:
11. Outflows higher than Cash Inflows [k] as net cash flow fallen by $5000 in March / outflows $3000 more than February [app]
12. Different credit terms [k] gets 1 month's credit from suppliers but gives customers 3 months [app]
13. Bought more stock [k] paid extra $4000 compared to February [app]
14. Opening balance in March not large enough [k] only $2000 [app] / if it was more than £6000 [app] closing balance in March would be positive
15. Poor cash flow management [k].
16. Note: Table included for ease of reference for 2c.
17. [2] Knowledge [2 × 1] - award 1 mark for each advantage identified
18. [2] Application [2 × 1] – award 1 mark if relevant reference made to this business / use of data
19. [2] Analysis [2 × 1] – award 1 mark for each relevant explanation (i.e. show how the point generates an advantage to a business)
20. Advantages might include:
21. Imbalances can be predicted / funding for shortfalls can be planned [k] so for the negative balance Jan-Mar [app] has plenty of time to arrange an overdraft [an]
22. Can assess impact of decision [k] such as giving 3 months credit [app]
23. Help get short term loan / overdraft [k] as show why need / able to repay [an]
24. identify possible causes of cash flow problems [k] e.g. cash inflow $5000 less in January than February [app] so could try to get customers to pay quicker [an]
25. Help manage cash flow better [k] as could try to reduce amount spent on stock in March [app]
26. Shows how much is spent each month [k].
27. [2] Knowledge [2 × 1] award 1 mark for each issue identified
28. [1] Application [1] – award 1 mark if relevant reference made to the business
29. [1] Analysis [1] – award 1 mark for relevant development of point(s)
30. [2] Evaluation [2] – justified decision made as to whether cash flow is more important to the business than profits
31. Points might include:
32. Main objective is to make a profit [k] without it, owners will question point of business [an]
33. Profit is a measure of success [k]
34. Profit is important for long term survival [k]
35. Profit is a source of finance [k] so higher chance of growth [an]
36. Need cash to operate / pay for immediate debts [k] so can make toys [app]
37. Help sales [k] as able to offer credit terms to customers [app] as have money to pay other outflows [an]
38. Positive cash flow shows able to manage its finances [k]
39. Positive cash flow means business is liquid [k] whereas currently has a negative closing balance [app] which shows possible financial difficulties ahead [an]
40. Less likely to need overdraft [k] which would add to costs [an].
41. Application might include: make toys, small business, use of numbers, 1 months credit from suppliers, gives 3 months credit, negative closing balance.
42. Developed answer:
43. Cash is needed for the business to operate [k]. If its outflows are more than its inflows, such as the negative closing balance in March [app], it will be unable to meet its immediate debts [an]. Thus cash is crucial for survival [eval]. In the short run a business can survive without making a profit so cash flow is more important to ensure the business lasts long enough to make profits [eval].