2013 Question 5 (C)

(i) Outline two reasons why a household should prepare a cash

flow forecast.

(ii) Illustrate how a household can overcome cash flow

problems. (20 marks) [Marking scheme: (i) 2 x 5 marks (2 + 3) (ii) 2 x 5 marks (2 + 3)]

(i) To avoid cash deficits:

- It lets the family know in advance when it is going to run short of money (a deficit).

As a result, it gives the family time to increase their income or to reduce their expenditure or to arrange for a bank overdraft in order to deal with this deficit. Therefore, it ensures that the household can pay its bills on time.

More efficient money management:

- Drawing up a household budget shows the family exactly where they are planning to spend their money.

It helps the household to manage its cash flow and live within its means. It acts as a control mechanism that can be used to measure actual cash flow against planned cash flow encouraging households to plan their finances sensibly and live within their means.

(ii) Decrease discretionary spending:

The household could decrease its cash outflows by targeting discretionary expenditure and reducing its spending on, for example, entertainment and holidays. This will ensure that the household is not spending money on non-essential items which will leave more money to pay bills etc. as they arise.

Increase income:

The household could attempt to increase its cash inflows by increasing the income levels of family members. This may involve a non-working family member returning to work. It might involve doing overtime to earn extra income or even getting a second job in order for them to overcome cash flow issues.