Cash Flow Practice Questions

Answer all parts of this question. You do not need to refer to a particular business.

Item A: Greenhill Garden Rooms

Greenhill Garden Rooms is a small business in Carlisle that designs and builds garden offices. It was set up in 2020 by two partners, Rhys Elliot and Carol Innes, who previously worked for a local building firm. A standard garden room is priced at £9 800. Customers pay a deposit of 25% when they place an order and pay the rest when the work is finished, which can be up to ten weeks later.

Greenhill buys timber, glass and insulation from a builders' merchant that expects payment within 14 days. The business employs three joiners who are paid weekly whether or not there is work to do. Demand is seasonal, with very few orders placed between November and February.

In March the partners must pay £4 900 for a replacement delivery van and the annual insurance bill. The partners are proud that Greenhill has never missed a payment to its builders' merchant. The partners are considering arranging an overdraft of £5 000 with their bank to help the business through the winter months.

Table 1: Cash-flow forecast for January to March

Item A: Brackwick Landscaping

Brackwick Landscaping is a partnership based in Carlisle. Gina Shaw and Marek Nowak set the business up in 2019 after working as gardeners for the local council. The partnership maintains gardens for homeowners and has a contract to look after the grounds of two hotels. A standard garden visit costs £45.

The business employs two full-time gardeners, who are paid at the end of each month, and leases a van for £380 a month. Fuel, plants and compost are bought from a garden centre in the city.

Demand is seasonal. Between November and February very few homeowners book garden visits, although the hotel contract is paid in equal monthly amounts throughout the year. The hotels pay 30 days after an invoice is sent.

Gina and Marek want to buy a ride-on mower costing £6 500 so that they can take on larger grounds-maintenance contracts. Before deciding, they have produced a cash-flow forecast for the first three months of the year.

Table 1: Cash-flow forecast, January to March

If they buy the mower in April, they would have to pay the £6 500 in full when it is delivered.

Item A: Mellor's Grooming Rooms

Mellor's Grooming Rooms is a dog grooming salon in Ipswich. Sophie Mellor opened the salon in 2021 as a sole trader after training as a groomer. A full groom costs £35 and Mellor's Grooming Rooms carries out around 180 grooms a month. Most customers are local dog owners who pay by card on the day.

Sophie rents the salon for £900 a month and employs one part-time groomer, who is paid weekly. She also pays for shampoos, towels and the electricity used by the heated dryers and washing machines.

Last year Sophie signed contracts with two boarding kennels. The kennels send dogs for grooming every week and now provide 60 of the 180 grooms each month, but they pay 30 days after receiving an invoice. In March, one kennel paid six weeks late and Sophie had to use her own savings to pay the salon rent.

Sophie's aim is to open a second salon in Colchester within three years. She has been told that she will need a deposit of £12 000 before a landlord will give her a lease.

Sophie is thinking about telling the kennels that, in future, they must pay on the day each dog is groomed. One of the kennels has said that it may take its dogs to another groomer if she does this.

Item A: Bell & Brush Decorators

Bell & Brush Decorators is a painting and decorating business based in Chester. It is owned by Patrick Bell, a sole trader, who employs three decorators. Household customers pay cash on the day their work is done.

Last year Patrick won contracts with two letting agencies to repaint rented properties between tenants. The contracts are worth £42 000 a year, but the agencies pay their invoices 60 days after the work has been completed. Patrick pays his decorators weekly. He buys paint, filler and fuel from a local supplier who insists on payment within 14 days.

Demand falls sharply in winter, when Patrick still has to pay wages, van leasing costs of £410 a month and insurance. Patrick has an overdraft facility of £3 000 with his bank. He has produced a forecast of the net cash flow of Bell & Brush Decorators for the next financial year.

The contracts with the letting agencies are due to be renewed. The agencies have said that they will not change their 60-day payment terms.

Figure 1: Forecast net cash flow for Bell & Brush Decorators for the next financial year