AQA BUSS2 Topic 3 - Improving Cash Flow

Inflows:

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

Outflows:

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

• 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

Short-term

• 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 

Problem:

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

However:

• 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)

Options:

• sell slow-moving or obsolete stock
• use the optimal method of production

Problem:

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

However:

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

Options:

• 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

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?