Cashflow Management - Improving Cash Flow

What are the main causes of cash flow problems?

• Low profits or (worse) losses

• Too much production capacity

• Excess inventories held

• Allowing customers too much credit and too long to pay

• Overtrading- growing business too fast

• Seasonal demand

How do you manage cash flow problems?

• Use reliable cash flow forecasting

• Keep costs under control

• Manage working capital effectively

• Choose the right sources of finance

What are the examples of effective working capital management?

• Stocks

• Debtors

• Creditors

How do you manage stocks?

• Stocks take the form of raw materials, work-in-progress and finished goods

• Stockholding is costly and therefore it is sound business to:

  • Keep smaller balances (just in time stocks)

  • Computerise ordering to improve efficiency

  • Improve stock control (e.g. stock control chart)

• This will cut spending on stocks but could leave the business vulnerable to stock-out

How do you manage amounts owed by customers?

• Credit control:

  • Policies on how much credit to give and repayment terms and conditions

  • Measures to Control Doubtful Debtors

  • Credit checking

• Selling off debts to debt factors

• Cash discounts for prompt payment

• Improved record keeping- e.g. accurate and timely invoicing

What is debt factoring?

• The selling of debtors (money owed to the business) to a third party

• This generates cash

• It guarantees the firm a percentage of money owed to it

• But will reduce income and profit margin made on sales

• The cost involved in factoring can be high

How do you manage cash paid to suppliers?

• Trade credit- amounts owed to supplier for goods supplied on credit and not yet paid for

• Delayed payment means that the firm retains cash longer

• Have to be careful not to damage the firm’s credit reputation and rating

• Trade creditors are seen (wrongly) as a ‘free’ source of capital

• Some firms habitually delay payment to creditors to enhance their cash flow- a short-sighted policy that raises ethical issues

How does short term finance improve a poor cash position?

• Cut costs

• Reduce current assets (stock and debtors)

• Increase current liabilities (delaying payment)

• Sell surplus fixed assets

How does long term finance improve a poor cash position?

• Increase equity finance

• Increase long-term liabilities

• Reduce net outflow on fixed assets