Causes of Cash flow problems

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  • Causes of Cash flow problems
    • Increased Costs
      • Raw Materials
      • Internal change (e.g. machinery breakdown, loss of key staff) this results in the business having to find a replacement.  This is often very costly for business :  recruitment ,/ training and also new staff will most likely not work as efficiently as experienced staff.
      • External change (e.g. economic downturn, accidents, change in legislation that requires a business to invest in new facilities)
    • Internal Factors
      • This could be due to
        • Poor budgeting / lack of control of spending
        • Holding too much stock
          • Holding too much stock ties up cash and could result in an increased risk that stocks may become obsolete
          • On the other hand...There needs to be enough stock to meet demand  !                                 Bulk buying may mean lower purchase prices
        • Late payments from debtors
          • Customers who buy on credit are called "trade debtors"                         Offering  credit is a good way of building sales                           On the other hand...Late payment is a common problem – and slow-paying customers often put a strain on cash flow              Worse still, the debt not paid at all!
        • Poor predictions
    • Sales are not as expected
      • This could be due to
        • Changing Fashion / Trends
        • Increased Competition
          • sales revenue would normally drop if a nearby business is offering similar products for lower prices etc . leading to cash flow problems.
        • Economic Decline
          • e.g during recession the sales revenue of  luxury goods businesses might drop during recession. This is because people might stop spending their money on non essentials. this could lead to cash flow problems for such businesses.
  • This could be due to
    • Increased interest rates
    • increased labour costs (wages)


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