Liquidity and cash flow

What are debtors and creditors?

Debtors- amounts of money owed by customers or a business

Creditors- amounts of money owed to suppliers

What are stocks?

Cash tied up in raw materials, work in progress and finished goods

What are the effects of too little working capital on a business?

- If raw material stocks are low, production may be halted

- If finished products stocks are too low, a business ,ay be unable to fulfil orders

- Bills might not be paid on time

What are the effects of too much working capital on a business?

- Higher costs of stocks as there are more stocks to keep, so more storage is required

- Stocks may need to be insured as it may perish

- Too much cash means its unlikely to earn interst compared with longer-saving options

What are the main causes of cash problems?

- Low profits or losses

- Expensive inventories held

- Allowing customers too much credit and too long to pay

- Seasonal demand

How can we improve cash flow in the short - term?

- Reduce current assets (stocks and debtors)

- In crease current liabilitues

How can we improve cash flow in the long-term?

- Increase long term liabilities

- Reduce net outflow on fixed assets