Making fInancial decisions: improving cash flow and profits

Methods of Improving Cash Flow (5)

• Shortening Receivables (Debtor) Period

• Extending Payables (Creditor) Period

• Improving Inventory Management

• Factoring or Invoice Discounting

• Leasing Rather Than Buying

Shortening Receivables (Debtor) Period include method and one pro and con.

Method: Encourage customers to pay more quickly by offering early payment discounts or stricter credit terms.

Assessment:

• Advantages: Faster cash inflows, improved liquidity.

• Disadvantages: May lead to customer dissatisfaction or loss of business if credit terms are too strict.

Extending Payables (Creditor) Period include method and one pro and con.

• Method: Negotiate longer payment terms with suppliers to delay outflows.

• Assessment:

  • Advantages: Keeps cash in the business longer, reduces pressure on cash reserves.

  • Disadvantages: May damage relationships with suppliers, and they might refuse or increase prices.

Improving Inventory Management include method and one pro and con.

• Method: Use Just-in-Time (JIT) or other lean inventory methods to reduce the amount of money tied up in stock.

• Assessment:

  • Advantages: Frees up cash, reduces storage costs.

  • Disadvantages: Requires efficient supply chain management, risks stock shortages.

Factoring or Invoice Discounting include method and one pro and con.

• Method: Sell unpaid invoices to a factoring company for immediate cash.

• Assessment:

  • Advantages: Quick access to cash.

  • Disadvantages: Loss of a percentage of the invoice value, higher costs long-term.

Leasing Rather Than Buying include method and one pro and con.

• Method: Lease assets (e.g., equipment) instead of purchasing them outright to spread costs over time.

• Assessment:

  • Advantages: Lower initial outflows, more predictable expenses.

  • Disadvantages: May be more expensive over time.

Methods of Improving Profits and Profitability (5)

• Increasing Prices

• Reducing Costs

• Improving Efficiency

• Selling More to Existing Customers

• Expanding into New Markets

Increasing Prices include method and one pro and con.

• Method: Raise prices for goods or services to boost revenue.

• Assessment:

  • Advantages: Direct impact on revenue and profits.

  • Disadvantages: May reduce customer demand, especially in highly competitive markets.

Reducing Costs include method and one pro and con.

• Method: Cut unnecessary costs, including fixed or variable costs.

• Assessment:

  • Advantages: Increases profit margins, more efficient operations.

  • Disadvantages: Cost-cutting may impact product quality or employee morale.

Improving Efficiency include method and one pro and con.

• Method: Streamline operations, reduce waste, or improve labour productivity (e.g., through automation or better training).

• Assessment:

  • Advantages: Sustainable improvements in profitability, higher productivity.

  • Disadvantages: Initial investment in technology or training may be high.

Selling More to Existing Customers include method and one pro and con.

• Method: Upsell or cross-sell additional products to current customers.

• Assessment:

  • Advantages: No customer acquisition cost, increases revenue per customer.

  • Disadvantages: May saturate existing customers, not sustainable in the long term if there’s limited product range.

Expanding into New Markets include method and one pro and con.

• Method: Enter new geographical or product markets to increase sales.

• Assessment:

  • Advantages: New revenue streams, higher sales volumes.

  • Disadvantages: Higher costs for market research, marketing, and possibly new production lines.

Difficulties in Improving Cash Flow (3) include method and one pro and con.

• Customer Credit Terms:

  • Issue: Customers may be resistant to shorter payment terms, leading to potential loss of sales or strained relationships.

• Supplier Negotiations:

  • Issue: Suppliers may refuse to extend payment terms or increase prices to compensate, making it harder to manage cash outflows.

• Inventory Reduction Risks:

  • Issue: Reducing inventory levels (e.g., with JIT) risks stock shortages, which could disrupt production or sales, ultimately hurting both cash flow and customer satisfaction.

Difficulties in Improving Profits and Profitability (3) include method and one pro and con.

• Customer Sensitivity to Price Increases:

  • Issue: Raising prices may reduce customer demand, especially if competitors do not follow suit, leading to a loss in market share.

• Negative Impact of Cost Cutting:

  • Issue: Reducing costs could result in lower product or service quality, which could harm brand reputation and reduce future sales.

• Investment Costs for Efficiency Gains:

  • Issue: Increasing efficiency (e.g., through technology or training) often requires a significant upfront investment, which may strain cash flow in the short term before profitability improvements are realized.