Date post: | 14-Apr-2017 |
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Improving cash flow
The actions that small and medium-sized businesses can take to improve their cash flow position
The ways that careful management of cash flow can improve a business’s performance
Causes of cash flow problems
Overtrading: expanding too quickly without organising funds to finance the expansion
Too much trade credit: customers have too long to pay delaying cash inflows
Poor credit control: not chasing up late payments or giving trade credit to unreliable customers
Incorrect CF forecasts
Inaccurate assumptions: sales lower, payments slower than expected;
Unexpected costs: price of imported materials rises, new tax/duty, mechanical breakdowns;
Inexperience: new business, product or market
The causes of cash variances One-off e.g. cancelled order
Seasonal variations Continuing trend of falling or rising
sales Self-correcting e.g. slump followed
by a surge (e.g. following change in marketing tactics by firm or rival): no action needed
How to improve cash flow: control working capital Distribution of Payments - Negotiate
improved terms for trade credit Discounts for early payments - Offer less
trade credit Debt factoring.The aim is to increase the financeavailable to the business for its day-
to-day trading activities.
Benefits of good cash-flow management
Reduced borrowing costs: going over your overdraft limit incurs a financial penalty;
Good relations with suppliers: prompt payments may lead to lower prices;
Public relations: customers may lose confidence if a firm is desperate for payment
Advice for the exam Identify the most appropriate
methods of improving cash flow for the business described in the scenario. It’ll be different in each case
Look for clues e.g. information about trade credit, the availability of assets and bank loans. This will help to establish the cause or most appropriate action to take
Use the financial information to support/illustrate your answer e.g. identify a trend
Analysis
Discuss the business’s cash flow forecast including the relationship between cash inflow and outflow variances
Establish the causes of a particular firm’s cash flow difficulties
Explain actions that business may take to improve their cash position and how the actions will help
Evaluation
To what extent should a manager be concerned about a particular cash-flow position?
What is the major cause of a business’s cash-flow weakness or strength?
What are the implications for a business resulting from effective management of its cash flow?
Questions: Patane Motorcycle Tours runs both short and long trips
throughout the year, although the warmer months, from September to April, generate the most revenue. Cash flow problems often arise in July as repairs are carried out on the bikes, and registration and insurances fall due. Propose ways for Patane Motorcycle Tours to manage their cash flow.
Judith runs a landscape gardening business and has come to you for financial advice. You find that she is reluctant to offer discounts for cash. Explain the reasons for and against offering discounts for cash and recommend some financial advice for Judith’s business.