Ways of Increasing Cash Inflow
Ways of Increasing Cash Inflow
Reduce customers' credit facilities
- Selling more of their products in cash and less on credit.
Reduce selling price
- By charging less for a prouct a business may sell more
Produce new goods or service
- By offering new products a business my improve their sales revenue and therefore their cash inflow
Collecting Outstanding Debts
- A business must chase up and collect any money owed to them.
Cash Flow Forecast Formulae
sales revenue - cost of goods sold
Net Cash Flow
cash inflow - cash outflow
closing balance from the previous month
opening balance + net cash flow
Why does a business need finance?
Starting up the Business
Increasing Working Capital
the finance needed by a business to pay its day-to-day costs.
money spent on fixed assets which will last for more than one year.
money spent on day-to-day expenses which will not involve the purchase of a long term asset.
Debt vs Equity
Internal: obtained from within the business itself.
External: obtained from sources outside of and separate from the business.
Debt: involves using money that must be repaid plus interest -> % extra to be paid on the loan.
Advantages: Owners retain full control, profits are not shared with lender, fixed interest rate, loan payments can be planned, relatively easy to get a loan.
Disadvantages: must be repaid, interest rates may be variable therefore can increase, high interest rates during difficult financial periods may cause problems with repayments, security is required to receive the loan.
Equity: this referred to raising money by selling shares in the company.
Advantages: benefit from shared ownership, shared risk, no monthly repayments, repayments (dividends) only necessary when firm makes profit.
Disadvantages: give up control of the business, must share profit, only available to limited companies, legally complicated and expensive to set up and manage.
Low or High Gearing
The extent to which a firm is funded by a debt or equity is known as a gearing ratio.
A low geared company has more equity than debt.
A high geared company has more loan capital than equity.
The most suitable source of finance depends on...
Purpose & Time Period
Legal form & Business size
State of Economy
Current gearing of the Business
Cash Flow Cycle
Debtors: customers who owe the business money.
Creditors: the business that offers trade credit to the customers.
Why use Trade Credit?
- So a company can sell products and gain revenue before paying supplies
- Industry normality [the usual way businesses are run]
- Suppliers can use good trade credit terms as a competitive methos.
If a company offers trade crefit to its customers, who will pay them later -> potential risk?
Cash vs. Profit
- Profit and cash are not the same
- A profitable business does NOT always have cash.
Surplus: extra money. A successful business must try to have more cash flowing in than out.
Shortfall: not enough. When a business allows more cash to flow out than to flow in.
Working Capital Cycle
1. Cash needed to pay for...
2. Materials, wages, rent, etc...
3. Goods Produced...
4. Goods sold...
5. Cash payment received for goods sold.
The longer it takes to complete these stages, the greater the firms need for working capital and cash will be. However, if it is too long between stages 4 to 5, then it could cause cash flow problems.
Why do Cash Flow problems occur?
- Having too much money invested in stocks -> stock is illiquid - cannot be easily turned into cash.
- Allowing too much credit to their customers -> if debtors do not pay on time.
- Unexpected changes in demand for their product -> quality decreases, new competitor, tastes or fashion.
- Overborrowing, therefore having large monthly interest payments
Ways of Reducing Cash Outflow
- Reduce wages/number of staff
- Look for cheaper insurance
- Look for cheaper electricity/gas
Reduce the Cost of Raw Materials
- Look for cheaper suppliers
Improve Credit Facilities with Suppliers
- Buy more on credit and less in cash
Invest in New Resources
- Using better technology and machineries should help business to reduce their costs.