Cash Flow - Problems

Question 1

What does poor cash flow mean?

Answer 1

There is not enough cash in the business to meet da-to-day expenses = lack of working capital

Question 2

What problems can poor cash flow cause?

Answer 2

-Staff may not be paid on time, which causes resentment & poor motivation
-Cant take advantage of discounts for early payment
- Creditors may not get paid on time & may insist on stricter terms in future
Creditors may take legal action to recover debt.

Question 3

What is a creditor

Answer 3

People / company firms owe money to

Question 4

Why might a creditor take legal action if a firm doesn’t pay a bill?

Answer 4

To recover the debt

Question 5

What happens if a firm can’t pay a debt?

Answer 5

If legal action is taken it may go into receivership (a “receiver” is appointed to reclaim the money owed by selling off firms assets)

Question 6

What are the 3 main reasons for poor cash flow?

Answer 6

• Poor sales - lack of demand so less money comes in
• Overtrading - takes on too many orders & buys too many raw materials & hires too many staff, then something goes wrong & it can’t pay it’s debts
• Poor Business Decisions - eg firm brings out new prods or expands into new markets but doesn’t bring in money as fore-casted - not enough planning

Question 7

How can a business improve cash flow?

Answer 7

• Reschedule receipts of income. eg give less generous credit terms or insist they pay cash
• Reschedule payments to their suppliers. eg negotiate better terms. Credit to cust should be less than credit from suppliers
• Sell stock of unsold products

Question 8

How does de-stocking help with cash flow?

Answer 8

Cash outflows are reduced as less raw materials are bought

Question 9

What is a disadvantage of de-stocking?

Answer 9

At some point you will run out of stock & then start paying out to make more stock