
In Electromac’s third year of trading it experienced cash flow problems despite making a high profit.
To improve its cash flow position Electromac should?
Select ONE answer:
- give longer credit terms to customers
- pay its suppliers immediately
- use a factoring service
- increase its inventory levels
Show your workings to arrive at your answer, and explain and justify your reasons:
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This multiple-choice question is suitable for Accounting KS5 classes.
The answer is 3
- Not correct – payments will be delayed which will reduce the amount of cash flowing into the business and worsen the cash flow position.
- Not correct – this will result in more cash leaving the business before it needs to which will put more pressure on cash flow.
- Correct – Cash flow is the movement of money in and out of a business. Electromac needs cash immediately to meet its day to day operations. Factoring will give immediate payment and therefore should ease cash-flow.
- Not correct – more cash will be tied up in inventory which will worsen the cash flow situation.
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