Warmup

a) 360 ✓ b) 540 ✓ c) 720 ✓ d) 960 ✓ e) 960 ✓ f) -(500) ✓ g) 1120 ✓ h) 1120 ✓ i) -(420) ✓ j) 700 ✓ k) 700 ✓ l) -(240) ✓ m) 460 ✓

a) 1200 ✓ b) 1100 ✓ c) 2600 ✓ d) 600 ✓ e) 1600 ✓ f) 2600 ✓ g) 4200 ✓

Cash flow problems

  • When a business does not have enough cash to pay its liabilities

Common issues

  • Sales prove lower than expected
    • Easy to be over-optimistic about sales potential
    • Market research may have had gaps
  • Customers do not pay up on time
    • A notorious problem for businesses, particularly small ones
  • Costs prove higher than expected
    • Perhaps because purchase prices turn out higher
    • Maybe also because the business is inefficient
  • Imprudent cost assumptions
    • A common problem for a start-up
    • Unexpected costs always arise - often significant

Causes of cash flow problems

  • Too much capacity
    • Spending too much on fixed assets
    • Very low liquidity on fixed assets
    • Worse if short term finance is used
  • Excess inventories held
    • Excess stocks tie cash up
    • Increased risk that stocks become obsolete
  • Allowing customers too much credit and too long to pay
    • “Trade debtors”
    • Offer credit = grow sales
    • Late payment is a common problem
    • Worse still, debt may go bad
  • Overtrading - growing business too fast
    • Where a business expands too quickly, putting pressure on short-term finance
    • Classic example - retail chains
      • Keen to open new outlets
      • Have to pay lots in advance
  • Unexpected changes in the business
  • Seasonal demand

Terminologies

Suppliers:

  • are creditors - you owe them
  • payables

Customers:

  • are debtors - they owe you
  • receiveables

To optimise cash flow, a business will look to speed up payments from customers and slow down payments to suppliers.

Managing cash flow problems

  • Choose the right source of finance
  • Make and action reliable cash flow forecasting
  • Manage working capital effectively

Receivables - Amounts owed by customers Payables - amounts owed to suppliers Inventories - Cash tied up in raw materials, work in progress and finished goods

Managing amounts owed by customers

  • Credit control
    • Policies on how much credit to give and repayment terms and conditions
    • Measures to control doubtful debtors
    • Credit checking
  • Selling off debts to debt factors
  • Cash discounts for prompt payment
  • Improved record keeping - eg accurate and timely invoicing

Debt factoring

  • The selling of debtors (money owned to the business) to a third party
  • This generates cash
  • It guarantees the firm a percentage of the money owed to it
  • But it will reduce income and profit margin made on sales
  • Cost involved in factoring can be high

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