Cambridge IGCSE and O Level Business Studies

20 Cash-flow forecasting and

working capital
Answers to Coursebook activities
Activity 20.1 (page 260)
1 February
2 Payments are greater than receipts, or outflows are greater than inflows.

Activity 20.2 (page 261)

1 May: 2; June: 7.
2 Positive cash balance in January and February becomes negative in March and April before returning
to positive in May and June. Temporary cash shortage in March and April may need overdraft facility
if it happens.
3 Knowing that there is a temporary cash shortage in both March and April, the finance manager could
look at ways of increasing cash inflows or decreasing cash outflows to improve the position. If not
possible then make sure the bank agrees to finance the shortage with an overdraft.

Activity 20.3 (page 262)

1 Month 1 Month 2 Month 3 Month 4
$000 $000 $000 $000
Cash inflow
Receipts 36 43 38 49
Total inflow 36 43 38 49
Cash outflows
Payments 33 46 45 37
Total outflow 33 46 45 37
Net cash flow 3 (3) (7) 12
Opening balance 11 14 11 4
Closing balance 14 11 4 16
2 Monthly closing balances are all now positive – better than having a negative cash balance for month 3.
3 Yes, because it improved closing balances and removed the need for an overdraft. No, because they do
not own the vehicle and in the long run it will cost more to have the vehicle. The one month negative
cash balance when buying the vehicle would have meant using an overdraft, but only for one month.
Would have been better off buying the vehicle rather than leasing it as they would own the vehicle and
cost would have been less.

Test yourself (page 262)

1 Needed to finance day-to-day expenses. Without cash, a business cannot pay its debts and will not be
able to survive.
2 To avoid negative cash balances that would require use of an overdraft or other form of borrowing,
both of which increase a business’s costs.
3 Using an overdraft or a short-term bank loan.

© Cambridge University Press 2018 Chapter 20 Answers to Coursebook activities 1

Cambridge IGCSE and O Level Business Studies

Case study (page 263)

a Flow of cash into and out of a business over time.
b Metrorail could not pay Sinqobile the money it was due on time. This will have reduced Sinqobile’s cash
inflows and made it more difficult to meet its cash outgoings.
c Sinqobile is a small company and will have lower cash inflows than a large business such as Metrorail.
If Sinqobile has a shortage of cash, banks might not be prepared to grant an overdraft facility or other
short-term borrowing, which could threaten the survival of Sinqobile.
d Make sure that Metrorail and other businesses it supplies services to pay on time. Could try to reduce
costs or delay payments to own trade payables.

Test yourself (page 264)

1 Capital needed to finance day-to-day running expenses and pay short-term debts of the business.
2 Working capital = current assets − current liabilities
3 Measures the ability of a business to pay short-term debts. Business that does not have enough working
capital may have to borrow the finance required. Will have to pay interest on the amount borrowed –
increases the business’s costs. If the business is unable to borrow the finance required, it may fail.

Case study (page 265)

a She took risks and had a business idea.
b To purchase raw materials for buggies and pay the wages of two employees.
c Measures Shonaquip’s ability to pay short-term debts. If Shonaquip does not have enough working
capital then she may have to borrow the finance required. Would have to pay interest on any amount
borrowed – increases the business’s costs. If the business is unable to finance short-term debts, it
may fail.
d Depends on the time it takes from buying raw materials, making these into buggies for sale, finding
buyers for these and then receiving payment from customers.

Exam-style practice questions (pages 266–267)

1 a Capital needed to finance day-to-day running expenses and pay short-term debts of the business (1).
Current assets − current liabilities (1) [Total: 2]
b A: 1060 − 640 = 420 (1); B: (−180) + 390 = 210 (1) [Total: 2]
c Closing balances in January and February are negative (1), do not have enough cash to pay business
expenses and debts (1), might need to use overdraft facility (1), overdraft is an expensive source of
finance, which increases Cards4U’s costs (1). [Total: 4]
d Increase cash inflows (1), manage trade receivables more effectively (1), offer discount to credit sales
customers to pay for goods sooner (1), increase cash sales (1). Reduce cash outflows (1), buy fewer
inventories (1), negotiate longer credit terms with suppliers (1). [Total: 6]
e No, because without cash Cards4U will not be able to pay its debts and will have no cash to pay for
supplies (1), without supplies nothing to sell, if cannot pay rent then will have to close down (1),
might waste cash buying goods does not need (1), credit customers take longer to pay if not properly
managed (1), if have a cash shortage have to use an overdraft or other short-term finance, which
increases costs (1). Statement agreeing or disagreeing supported by points discussed (1). [Total: 6]
2 a To pay day-today expenses, to avoid the need for an overdraft which increases the business’s costs. [2]
b Difference between cash inflows and cash outflows for a particular time period. [2]

© Cambridge University Press 2018 Chapter 20 Answers to Coursebook activities 2

Cambridge IGCSE and O Level Business Studies

c Jan Feb Mar Apr

$000 $000 $000 $000
Cash inflows
Credit sales 230 250 200 180
Total cash inflows 230 250 200 180
Cash outflows
Payments 160 350 230 160
Net cash flow 70 (100) (30) 20
Opening balance 20 90 (10) (40)
Closing balance 90 (10) (40) (20) [Total: 4]
d Cash inflows may improve (1), recovering money owed from trade receivables on time (1), more cash
coming in to the business to finance cash outflows (1). Cash outflows kept to a minimum (1), avoid
paying trade payables early (1), ensure cash outflows not greater than cash inflows – improves cash
balances (1). [Total: 6]
e ABC has cash shortages from February to March (1), needs to increase cash inflows in these months or
reduce cash outflows (1). Offer discounts to trade receivables to encourage early payment (1), improve
credit control to make sure trade receivables pay on time (1), reduce inventories (1). Delay purchases if
possible (1), ask trade payables for longer credit period (1). [Total: 6]

© Cambridge University Press 2018 Chapter 20 Answers to Coursebook activities 3