Podcast
Questions and Answers
Which of the following strategies would best help a new business avoid cash flow problems associated with investing in fixed assets?
Which of the following strategies would best help a new business avoid cash flow problems associated with investing in fixed assets?
- Delaying investments in fixed assets until the business is profitable.
- Securing long-term loans to cover the initial costs of fixed assets.
- Leasing equipment and vehicles instead of purchasing them outright. (correct)
- Immediately purchasing all necessary equipment to take advantage of economies of scale.
A rapid expansion funded by debt can lead to overborrowing. What is a potential consequence of overborrowing for a business?
A rapid expansion funded by debt can lead to overborrowing. What is a potential consequence of overborrowing for a business?
- Improved credit rating and access to more favorable loan terms.
- A weakened cash position and reduced control over the business. (correct)
- Reduced interest costs due to economies of scale.
- Increased ability to fund future growth through retained earnings.
A fruit grower experiences a surge in cash inflow during harvest season but struggles to manage expenses for the rest of the year. Which strategy would be most effective in mitigating this issue?
A fruit grower experiences a surge in cash inflow during harvest season but struggles to manage expenses for the rest of the year. Which strategy would be most effective in mitigating this issue?
- Securing a large line of credit to cover expenses during low-revenue periods.
- Diversifying into other agricultural products with different harvest seasons.
- Investing heavily in marketing campaigns during the off-season to stimulate demand.
- Implementing a budgeting system to allocate cash reserves for off-season expenses. (correct)
What is the most likely outcome if a business consistently overestimates its sales and produces excess inventory?
What is the most likely outcome if a business consistently overestimates its sales and produces excess inventory?
How does 'overtrading' typically manifest itself in a rapidly growing business?
How does 'overtrading' typically manifest itself in a rapidly growing business?
What is the primary risk associated with poor inventory control for a business?
What is the primary risk associated with poor inventory control for a business?
A manufacturer runs out of a critical component, halting production. What is the most likely consequence of this situation?
A manufacturer runs out of a critical component, halting production. What is the most likely consequence of this situation?
Which of the following is the most likely outcome of a business launching a new product with an inappropriate pricing strategy?
Which of the following is the most likely outcome of a business launching a new product with an inappropriate pricing strategy?
How can negative feedback about a product spread and affect a company's reputation?
How can negative feedback about a product spread and affect a company's reputation?
Samsung had to completely withdraw its Samsung Note 7 smartphone after serious issues with the batteries. What would have been the most likely reason for this?
Samsung had to completely withdraw its Samsung Note 7 smartphone after serious issues with the batteries. What would have been the most likely reason for this?
Flashcards
What is overtrading?
What is overtrading?
Occurs when a business attempts a large production volume with insufficient cash.
What is overborrowing?
What is overborrowing?
Businesses may borrow to finance growth, but more loans can increase interest costs and risk.
What is allowing too much credit?
What is allowing too much credit?
Businesses allow customers too long for payment, causing delays in cash collection.
Investing too much in fixed assets
Investing too much in fixed assets
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What is poor inventory control?
What is poor inventory control?
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Overestimating Sales
Overestimating Sales
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Seasonal Factors
Seasonal Factors
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Poor Marketing
Poor Marketing
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Poor quality
Poor quality
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Study Notes
- Many businesses fail due to running out of cash, often because entrepreneurs focus too much on profit and neglect cash importance.
Poor Management of Working Capital and Cash
- Investing too much in fixed assets early on can drain limited funds; leasing fixed assets may be a better option.
- Allowing excess credit to customers leads to delayed payments, forcing the business to borrow.
- Failure to control debtors leads to bad debts which causes overborrowing to finance growth and increased interest costs, threatening cash position and control.
- Disneyland Paris had to get £1750 million from its parent company to reduce its debt in 2014.
- Seasonal trade fluctuations, require careful management as expenses must be paid without cash flowing in outside of harvest season.
Overestimating Sales
- Forecasting sales is difficult due to rapidly changing consumer tastes and complex data analysis.
- Optimistic entrepreneurs may overestimate sales, leading to excess stock, inadequate revenues, and cash flow problems.
Overtrading
- Rapidly growing fund volume of production with inadequate cash
- Overtrading is likely to occur when customers are given generous credit terms
- Symptom include the the need to keep borrowing money to meet day-to-day expenditures
Poor Inventory Control
- Ineffective inventory control can lead to holding:
- Too much stock
- Too little stock
- The wrong stock
- Large inventories tie up money in unproductive assets, incurring costs without generating returns until sold.
- Significant inventory holding costs include: storage, handling, labour, insurance, stock theft, and obsolescence.
- Buying the wrong stock leads to losses if the retailer buys stock not in demand and has to sell for a loss.
- Running out of stock lead to risk of losing business because production may be stopped due to lack of components.
Poor Marketing
- Businesses that launch new products that fail to meet customer needs are likely to have difficulties.
- Marketing problems include inappropriate pricing strategies, wasteful promotions, and incorrect market positioning.
- Bad marketing can confuse customers and stop them buying the product from the business.
- India's Klozee (clothing rental service) closed after 6 months due to low demand and a lack of a renting culture.
Poor Quality
- Supplying products that fail to meet customer quality expectations lead to lost customers and long-term reputation damage.
- Samsung recalled its Note 7 smartphone in 2016 due to battery issues, costing up to $17,000 million.
- News of substandard products propagates rapidly through social media, boosting quality assurance importance.
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