3.5.4 Making financial decisions: improving cash flow and profits

Getting goods to market in shortest time possible; sooner reach customer, sooner payment received. Production + distribution efficient as possible.

Getting paid as quickly as possible; ideal arrangement - cash on delivery. Most businesses work on credit - usually interest-free credit, so customer little incentive to pay quickly. Early payment should be encrouaged by offering incentives eg discounts for early payments.

Debt factoring; may be possible to speed up payments by factoring money owed to business. Seller receives 80% of amount due w/in 24 hours of invoice being presented. Factor collects money from customer when credit period over + pays seller remaining 20% less the factoring fees.

Keeping stocks of raw materials to min. Good stock management eg JIT means business not paying for stocks before needs them for production.

Lease equipment rather than buy - higher costs, conserves capital. Same with renting rather than buying buildings.

Discounting pices - increases sales, reduces stock, generates cash BUT may undermind pricing structure + leave low stocks for future activity.

Reduce purchases - cuts down expenditure BUT may leave business w/o means to continue.

Negotiate more credit - allows time to pay BUT may tarnish credit reputation.

Credit control, chase debtors - gets payments in, + sooner BUT may upset customers.

To increase profits:
 - increase revenue
 - decrease costs
 - combination of both

To increase revenue, may consider marketing mix. Changes to product - more appealing. Better distribution - more available. Changes to promotion - customers more aware of its benefits. Business needs to be careful rising costs don't swallow rise in sales revenues.

To reduce costs, may exmaine functional areas (eg marketing, ops, people + finance):
 - could firm continue w/ fewer staff?
 - are there ways of reducing wastage?

Should look for ways of making product more efficiently, use fewer inputs, paying less for inputs. But, must be careful when reducing costs - quality not also reduces. Might -> fall in sales + revenue. Cutting staff may cut costs but lower efficiency, reduce customers + income. Should weigh up consequences of any decision.

Increase price: would boost profit per sale, but danger - sales overall may fall so much, overall profits reduced. Impact of any price increase depends on PED; more price elastic demand is, greater fall in demand will be - less likely a firm will want to put up prices. 

Cut costs - if can be done w/o damaging quality, then makes sense. Better bargaining to get supply prices down/better ways of producing may -> higher profits per sale. However, needs to be careful to ensure reducing costs doesn't -> deterioration of service or quality of product.

Company cash flow dominated by credit - few companies pay cash + few sell for cash - all done w/ credit. Biggest difficulty - financial credibilty. If other businesses fear business will close - will do. Suppliers will no longer give credit, more cash needed to keep in business, + if customers increasingly worried about survival, prefer to go elsewhere.

Critical to avoid any suggestion you're struggling financially. If need to improve cash flow - do it w/ subtlety. Beware of demanding shorter credit periods from customers, or longer ones from suppliers. Thi is a reason why companies try to improve cash flow position by cutting inventories or by speeding up production programme.

Can be improved in 1 of 3 ways: raise prices (if price elasticity isn't too high), rasie sales volumes or cut costs. Each diff b/c business will have already done what's necessary to optimise revenues + profits - prices already set a t'right' level, costs already as low as makes sense.

Main difficulties:
 - raising prices: for price elastic products, cuts revenue as % fall in sales outweighs % price rise. Even for price inelastic product, still can be concerns - if other companies can see 1 high-priced brand making big profit margins, will want to compete - pushing up price, ST boost to profit, but cost of future decline in market share.
 - boosting sales volumes: either done by custting prices (harder to boost profits) or strategy qill require some addition to costs eg extra advertising spending. Careful analysis required to demonstrate boosting sales volumes end up improving profit.
 - cutting costs: may seem obvious to look for cheaper supplier, but every business looking for this; risk cheaper supplier will have negs eg poorer quality, worse delivery reliability or scandal about child labour. Cutting fixed overhead costs by moving to cheaper location - losing key staff/stirring hostile press coverage.