Cash Flow

Cash flow vs profit

  1. Offering credit for a sale gains revenue but not cash flow

  2. Depreciation on non-current assets - outflows = what is spent, value lost over time = cost

  3. Taking out a loan creates inflows but not revenue (creates cost as you have to pay it back)

Pros of positive cash flow:

  • Can pay suppliers on time

  • Can pay employees on time

  • Can handle unforeseen events

  • Take advantages of opportunities

  • Helps expand business

Cons of negative cash flow:

  • Can’t pay suppliers on time

  • Can’t pay employees on time

  • Can’t hand unforeseen events

  • Can’t take advantages of opportunities

  • Harder to expand business

Causes of cash flow issues:

  • Poor sales

    • Lower revenue

    • Lower cash inflows

  • Overtrading - buying too much stock and wasted cash buying the stock

    • Less cash

    • Common with JIC methods of stock control

  • Poor creditor and debtor management

    • Creditor - money you owe to people

    • Debtor - money people owe you

    • Need to get debtors to pay you back when you pay creditors

  • No cash flow forecast

    • No predictions, not anticipating or planning

    • Poor business management - bad if the business has seasonal fluctuations

Solutions to cash flow problems:

  • Rescheduling payments

    • Increasing speed that debtors pay you (increasing cash inflows)

    • Decreasing speed that you pay creditors (reducing cash outflows) (can damage relationship with suppliers

  • Generate sales

    • Marketing

    • Increase price

  • Decrease cash outflows

    • Hold less stock

  • Use sources of finance

    • Overdraft - easy, solves unexpected problems, pay a lot of interest, ruin credit score if you get one consistently