5.4.1 Flashcards
When to problems with cash flow occur?
Cash-flow problems occur when inflows are insufficient to cover the outflows. Suitable solutions need to be provided to prevent the business having poor liquidity and failing.
Causes of cash flow problems
Poor sales and low profits
High costs and underestimating costs
Unexpected increases in costs or falls in demand
Seasonal demand
Over investment in non-current assets – such as buildings and vehicles.
Over trading
Other causes of cash flow problems?
Credit terms offered – When firms sell goods using credit sales, the costs are incurred in making the good but the payment is not received until a later date, often a month. This interest-free credit period offered is a good marketing tool, particularly when selling to other businesses, but will impact cash flow, especially if firms do not pay on time.
Methods of improving cash-flow problems?
Bank overdraft
Short-term loans
Debt factoring (also known as factoring or invoice factoring)
Sale of assets
Sale and leaseback of assets
Diversifying the company’s product portfolio to increase sales
Expanding into new markets nationally or internationally
Improving decision-making procedures, planning, monitoring and control of stock and credit terms
Better market research to anticipate changes in demand and costs
Setting up a contingency fund
Difficulties improving cash-flow?
Firms, particularly small firms, may find it difficult to re-negotiate credit terms with its customers and suppliers
Some firms may not be able to reduce their stock levels, for example, retailers
Gaining access to sources of finance to solve cash flow problems, such as loans and overdrafts
Cost of finance to solve problems , for example, interest charged
Analysing the firm’s performance to find out what the cash flow problems are can be difficult
There may be an impact on brand image from the actions firms may take to solve cash flow problems, for example, Cadbury and Twinning’s moving their production to Poland for cheaper labour costs
Short-term decision-making may impact on the business in the long-term, for example, finding cheaper suppliers may impact the overall quality leading to poor image and lower future sales.
Cash flow problem(poor stock control)
Poor stock control – Cash can be tied up in the form of stock. Many firm will attempt to introduce a just-in-time stock control system to prevent this but it is not possible for all business types, for example, retailing where customers want to see and try products.
Cash flow problems (poor magement of suppliers and
Poor management of suppliers and credit terms – Firms need to negotiate longer credit periods with suppliers to ensure they receive cash from customers before they have to pay their suppliers. They will want to avoid paying all of their outflows at the same time.
