Question

State actions the owner could take to reduce estimated outflows and negatives of doing so and limitations:

A. Increase expenses to boost cash outflows; helps with tax benefits.
B. Decrease expenses to reduce cash outflows; potential impact on quality.
C. Reduce estimated outflows to enhance liquidity; may affect business operations.
D. Maintain outflows as estimated; ensures stability but limits growth.

Answer 1

The correct option is C). To manage cash outflows in a business, owners can increase expenses for tax benefits, decrease expenses to improve liquidity or maintain estimated outflows for stability, each with its own pros and cons in terms of liquidity, quality, and growth potential.

Step-by-step explanation:

The question pertains to the strategies that a business owner can employ to manage cash outflows and the accompanying effects and limitations of each strategy. The options are:

• Increasing expenses to boost cash outflows for tax benefits may seem counterintuitive but can make fiscal sense if the associated tax deductions reduce the overall tax liability, thereby improving net cash position in the long run.
• Decreasing expenses to reduce cash outflows, although beneficial for liquidity, can adversely impact the quality of products or services, potentially harming the company's reputation and future revenue streams.
• Reducing estimated outflows enhances liquidity but might disrupt ongoing business operations or delay investments necessary for growth or maintenance.
• Maintaining outflows as estimated provides stability in the business but may limit opportunities for growth by not capitalizing on potential investments.

Each of these strategies has its pros and cons. They need to be considered as part of a comprehensive management plan that looks at short-term benefits versus long-term business objectives.