Improving Cash Flow

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  • Improving Cash Flow
    • Key Terms
      • Creditors: suppliers owed money by the business - purchases have been made on credit
      • Credit control: the monitoring of debts to ensure that credit periods are not exceeded
      • Bad debt: unpaid customer bills that are now very unlikely to ever be paid
      • Overtrading: expanding a business rapidly without obtaining all of the necessary finance so that a cash flow shortage develops
    • Causes of cash flow problems
      • Lack of planning
      • Poor credit control
      • Allowing customers too long to pay debts
      • Overtrading
      • Unexpected events
    • Ways to improve cash flow
      • Increase cash inflows
        • Overdraft
          • High rayes of interest
          • Can be withdrawn by the bank, causes insolvency
        • Short-term loan
          • Interest costs
          • Must be repaid in time
        • Sale of assets
          • If done quickly can result in low price
          • May be required at a later date for expansion
          • Could have been used as collateral for future loans
        • Sale and leaseback
          • Annual overheads
          • Loss of potential profit is asset rises in price
          • Could have been used as collateral for future loans
        • Reduce credit terms to customers
          • Weakness against competition
        • Debt factoring
          • Reduces profit - only receive 90-95% of debt
          • Impact on reputation when debt is collected from customer by a finance business
      • Reduce cash outflows
        • Delay payments to suppliers (creditors)
          • Suppliers may reduce any discount offered with the purchase
          • Suppliers may insist on cash upon delivery or refuse to supply at all
        • Delay spending on capital equipment
          • Efficiency of business may fall if old equipment isn't replaced
          • Expansion becomes difficult
        • Use leasing not outright purchase of capital equipment
          • Asset isn't owned by business
          • Interest and annual overheads
        • Cut overhead spending that does not directly affect output, e.g. promotion costs
          • Future demand may be reduced due to lack of promotion


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