Unit 3.3 Effective Financial Management Flashcards
Some examples of cash inflows
Cash sales loans from banks grant interest on bank balance receipts from trade debtors sale of inflow share capital invested
Examples of cash outflows
Dividends paid to shareholders Payments to suppliers Payments for fixed assets Repayment of loans Wages and salaries Interest on loans and overdrafts Tax on profits
Causes of cash flow problems
Low profit or losses Too much production capacity Too much stock Allowing customers too much credit Overtrading Unexpected changes in the business Seasonal demand
Why is a low profit or loss a problem to the cash flow
Because if you don’t generate enough profit you don’t have anything to cover your cost and couldn’t pay for your liabilities.
A new business starting out.
Why does too much production capacity result in a cash flow problem
It is expensive to run a factory but if you don’t make as many products as possible in the factory it means you’re not using the production capacity to its full extent so there is less outflows.
Paying to run it but not using.
Having a factory that can make 500 but is only making 200.
Why does too much stock create cash flow problems
Because too much money is being paid for stock and it’s not generating any inflow as it is not all being sold.
Perishable items in a restaurant or in style clothing that will go out of style.
Why does allowing the customer too much credit create cash flow problems
Because your outflows are the a lot but the inflows are less because ‘buy now pay later’ creates a lot of outflows but no short term inflows.
Sofa shop - buy not pay later but they are expensive.
Why does Overtrading (growing too fast) cause cash flow problems
Because by growing your business without a guarantee you will have any customers means no guarantee of inflow to cover the growing cost of your business.
A small business tries to expand without any solid customers.
Why do unexpected changes in the business result in cash flow problems
If something happens that affects your inflow then it affects the outflow as well.
CEO dies so business isn’t run as efficiently.
Why does seasonal demands cause cash flow problems
Because it has a lot of inflows during the season but little to none the other times of the year so it is hard to cover everything for the whole year.
A Christmas shop.
Examples of how to solve cash flow problems by changing inflows
Increase sales revenue Destocking Improving cash flow from customers Bank loans Share issue Sale of assets
Examples of how to solve cash flow problems by changing outflows
Reduce orders for new materials and stock
Delay paying invoices
Lease rather than buy
How can managing stock help solve cash flow problems
- businesses should keep smaller balances (JIT)
- computerise their orders so more efficiency
- improve stock control
This all cuts down spending on stock but may leave firm vulnerable to stock out.
How does managing debtors better improve cash flow
Credit control:
- policies on how much credit allowed and repayment terms and conditions
- credit checking
- selling off debts to debt factors
- cash discounts for prompt payment
- improved record keeping
How does a bank overdraft (compared to a bank loans) help solve cash flow problems
- easy to arrange
- flexible so you can use as cash flow requires
- interest is only paid on the amount borrowed under the facility
- not secured on asset of business
But it can be withdrawn at short notice, has a high interest rate and interest varies with changes in interest rate
How can a bank loan (compared to a bank overdraft) help solve cash flow problems
- a greater certainty of funding than a bank overdraft (provided the terms of the loan are complied with)
- lower interest rate than a bank overdraft
- appropriate method of financing fixed assets
But is requires security, is harder to arrange and interest is paid on full amount out standing.
How can share issue help solve cash flow problems
Because a share in the business is sold go an individual or another business which generates income as they pay cash for their shares.
How does sale of assets help solve cash flow problems
Because selling spare or surplus assets is a way to achieve a short term boost to cash flow e.g spare Land.
But not all businesses have spare assets.
How can reducing orders help solve cash flow problems
Because if you order fewer materials from suppliers then you have less outflow. Usually done in response to a fall in sales.
How does trade creditors help solve cash flow problems
Because the amount owed to suppliers for goods supplied on credits are not yet paid for and this delayed payment means the firm can retain cash longer.
But must be careful not to damage the firms credit reputation and rating.
How does sale and leaseback help solve cash flow problems
It involves selling fixed assets then leasing them back from new owner so they get an income from selling the asset and can still use it but can only be done once.
What are variable costs
Costs that vary directly with the level of output.
Increase as sales increase.
What are fixed costs
Costs which remain the same regardless of how many products you sell/ product.
Not affected by sales e.g rent.
What are total costs
Variable costs + fixed costs
