AQA BUSS2 Topic 3 - Improving Cash Flow

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Cash inflows & cash outflows


  • cash sales
  • receipts from trade debtors
  • sale of fixed assets
  • interest on bank balances
  • grants
  • loans from bank 
  • share capital invested


  • payments to suppliers
  • wages & salaries 
  • payments for fixed assets
  • tax on profits 
  • interest on loans & overdrafts
  • dividends paid to shareholders
  • repayment of loans
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Causes of cash flow problems

  • low profits or losses
  • too much production capacity 
  • too much stock
  • allowing customers too much credit 
  • overtrading - growing too fast
  • unexpected changes in the business
  • seasonal demand
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Ways to improve cash flow


  • cut costs 
  • reduce current assets (stock & debtors)
  • increase current liabilities e.g. delay payments
  • sell surplus fixed assets

Medium to long-term

  • improve efficiency & productivity
  • increase equity finance
  • increase long-term liabilities 
  • reduce spending on fixed assets 
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Managing cash flow tied up in stocks


  • excess stocks tie up cash - they have been paid for 
  • increased risk that stocks become obsolete 
  • extra costs of stock-holding e.g. warehousing 


  • needs to be enough stock to meet demand e.g. seasonal 
  • bulk buying may mean lower purchase prices
  • stocks provide flexibility for production (when, how much)


  • sell slow-moving or obsolete stock
  • use the optimal method of production
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Handling cash flow problems with customers


  • late payment is a common problem
  • worse still, the debt may go "bad" = lost revenue 


  • offer credit - good way of building sales 
  • in many industries it is accepted practice to offer credit 


  • better credit control e.g- policies on how much credit to give & repayment terms and conditions, credit checking
  • sell amounts owed to debt factoring firm
  • cash discounts for prompt payment
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Other options

Debt factoring

  • a firm buys the amounts outstanding from customers
  • factoring firm chases the debts 
  • main benefit: short-term cash inflow
  • a cost: usually 10-15% of value of debts bought

Sale of assets 

  • converting fixed assets e.g. land, machinery, into cash
  • can be significant - depends on assets held
  • can only be done once 
  • do the assets contribute toward profitable activities?
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