IGCSE Business Studies Exam Style Questions (Cash flow forecasting and working capital)

Question

Bruno manages a hotel. Most of the hotel bedrooms are occupied during the main tourist season, which lasts for seven months. The hotel's main cash outflows are the same each month but food costs and some employee costs increase when there are more tourists. Bruno plans to have the hotel redecorated but he does not know whether the cost of this will mean the hotel exceeds its overdraft limit. The hotel's bank account is overdrawn for several months of each year.

a. Define 'cash outflows'. (2 marks)

b. Identify two likely cash outflows for Bruno's hotel. (2 marks)

c. Outline two effects on Bruno's hotel if he offers hotel guests credit of one month following a stay in the hotel. (4 marks)

d. Explain two likely benefits to Bruno of producing a cash flow forecast. (6 marks)

e. Explain the advantages and disadvantages of any two ways in which Bruno could improve the cash flow position of the hotel. Which way would you advise him to use? Justify your answer. (6 marks)

Please try to answer these questions as an example answers response. Thank you so much.

Answer 1

a. Define 'cash outflows'. (2 marks)

Cash outflows refer to the money leaving a business for various expenses. This can include payments for goods and services, wages, rent, and other operating costs.

b. Identify two likely cash outflows for Bruno's hotel. (2 marks)

1. Wages for employees. Bruno must account for overtime, the need for employees to assist with the influx of guests and requests plus ensuring that there is additional staff to deal with vendors, event planning and deliveries.
2. Payments for food supplies. With the influx of guests, it is likely that there will need to be a higher inventory of food supplies in stock and being delivered on a more consistent basis during the busy season. This also means that there may be a need to purchase more storage or contract negotiations with vendors based on clientele and bookings.

c. Outline two effects on Bruno's hotel if he offers hotel guests credit of one month following a stay in the hotel. (4 marks)

1. Increased cash flow issues: Allowing guests credit could delay incoming revenue, worsening the hotel's overdraft situation during off-peak months.
2. Improved guest satisfaction: Offering credit might attract more guests, build loyalty and referrals, potentially increasing revenue in the long term.

d. Explain two likely benefits to Bruno of producing a cash flow forecast. (6 marks)

1. Better financial planning: A cash flow forecast would help Bruno identify periods of high or low liquidity, enabling him to plan for expenses like redecoration.
2. Improved decision-making: It would allow Bruno to make informed decisions about expenditures, such as whether to proceed with the redecoration or seek additional financing.

e. Explain the advantages and disadvantages of any two ways in which Bruno could improve the cash flow position of the hotel. Which way would you advise him to use? Justify your answer. (6 marks)

1. Increase room rates during peak season or offer bundles (example: Book 4 nights and get the 5th night at 50% off)

1. Advantages: Higher revenue during high-demand months could help offset periods of low cash flow.
2. Disadvantages: May deter price-sensitive customers, leading to lower occupancy especially if preferred rooms are booked and guests leave smaller rooms empty.

2. Negotiate payment terms with suppliers

1. Advantages: Delaying supplier payments could ease short-term cash flow constraints.
2. Disadvantages: Strained supplier relationships might lead to less favorable terms or higher costs in the future.

Recommendation:

I would advise Bruno to increase room rates during the peak season. The increased revenue is immediate, aligns with higher demand, and does not risk supplier relationships, making it the most sustainable solution for improving cash flow.