Cash Flow

IDENTIFYING CASH FLOW PROBLEMS

Many businesses go into liquidation and close down because of the lack of sufficient cash to meet commitments, not because of lack of profits. It is therefore vital that a business keeps a record of its cash flows and uses it to monitor and control inflows and outflows of money.

Cash comes in from:

*profits
*sale of fixed assets
*sale of stock
*decreases in debtors
*capital introduced
*loans receivedincreases in creditors

and out from:

*losses
*purchase of fixed assets
*purchase of stock
*increases in debtors
*drawings or dividends paid
*loans repaid

*decreases in creditors

Therefore managers must be aware of why the business can end up with no money to pay off debts.

REASONS FOR CASH FLOW PROBLEMS

*Could be higher wages (ie more staff)
*poor credit terms with suppliers and customers
*too much stock lying in storage and not being sold
*seasonal differences with regards to sales (drinks firms sell more in summer; think of tourist *resorts; gas and electrical firms make more profits during the winter)
*rise in expenses and overheads (even fuel prices can affect EVERYTHING!!!)

SOLVING CASH FLOW PROBLEMS
*business can arrange loans for the periods when they have negative cash flow
*they can raise prices on goods they sell to raise revenue
*they can change credit terms with suppliers (trying to get longer to pay off their purchases)
*or try and negotiate better discounts
*or they can change credit terms for customers by making them shorter
*they can also cut overheads and expenses
*introduce Just-in-time (or lean production) stock methods
*hold off on buying new machinery and equipment
*and can make redundancies (labour is one of the highest expenses)

TIP:

When you identify and give a reason, make sure they are compatible and make sense. ie don't identify having high wages as a problem and then say you will solve that by changing credit terms! (Believe me I have seen it happen!).