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