Methods for improving cashflow

Last updated Feb 7, 2023 Edit

• Business

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 ✓

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

• 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

• 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

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.

• 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

• 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

• 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

Business