Cash Flow Question

From 2005 Past Paper


Identify 4 sources of cash flow problems and suggest one solution for each source you have identified.

Sources of cash flow problems:

too much money tied up in stock
allowing customers too long to pay
debtors not paying on time
high levels of borrowing along with high interest rates
high drawings
low sales
high expenses
purchasing capital equipment

Solutions
introduce JIT
offer discounts to encourage prompt payment
offer discounts/promote cash sales
sell any unused assets
reduce loans by eg increasing number of investors
debt factoring
sale and leaseback
extended credit
arrange overdraft/loan
cut costs
promote product or serv

Cash Flow

Cash Flow is a statement which lists all likely inflows and outflows of cash on a monthly basis.

Many businesses fail due to poor cash flow.

A prediction so adjustments can be made to expenditure or income,

Such as leasing equipment
Increasing revenue
Invest in assets for the future
Borrowing arranged.

More likely to convince lender if it can be shown that the money borrowed could be paid
back.
It could be used when applying for bank loan
Or when making comparisons between years.

Businesses must stick to the cash flow forecasts where possible.

Cash Flows can help arrange short-term loans and overdrafts which can be arranged ahead of time which helps keep costs down.


LIMITATIONS OF CASH FLOW
Previous records have to be accurate in order to aid future planning.
Does not take into account one-off happenings, it is based on what is known and regular.