Improving Cash Flow

HideShow resource information
  • Created by: amy
  • Created on: 21-05-13 19:39

Key Terms

  • SHORT-TERM LOAN- a sum of money taken out from a bank for a specific purpose and which will be expected to be repaid with interest within 2 years.
  • FACTORING- when a business sells their credit sales debts on to a third party for less than the face value of that debt. This improves short-term cash flow.
  • SALES OF ASSETS- the transfer of ownership of a business asset to another business usually in exchange for cash.
  • SALE AND LEASEBACK- the sale of assets to raise cash and then the renting back of those same assets for an agreed fee to allow their continued use.
  • WORKING CAPITAL- the cash required for the day-to-day operations of a business. e.g. to pay wages and buy stock.
  • BANK OVERDRAFT- an agreement whereby the holder of a current account at the bank is allowed to withdraw more money than there is in the account.
1 of 8

causes of cash flow problems

Key Issues include:

  • Seasonality- a business that relies upon sales from a certain time of year should be able to predict when cash flow problems are likely and negotiate a bank overdraft.
  • Overtrading- this is when a business expands too rapidly and buys more stock than they have customers for and also offers customers credit terms so delaying cash flows.
  • Credit Sales- whilst the offer of credit can be a positive marketing tool, it can delay valuable inflows of much needed cash into the business.
  • Poor Stock Management- the holding of excessive levels of stock is a big opportunity cost for a business as it means that cash is tied-up on your shelves instead of in your bank account.
2 of 8

ways of improving cash flow

1. Bank Overdrafts

a business can reach an agreement with their bank that allows them to spend more cash than is actually in their account up to an agreed limit and for which interest will be charged daily.

Benefits

  • Greater Flexibility
  • Interest is only charged on the amount owed
  • No security is needed

Negatives

  • can be withdrawn by the bank at very short notice
  • interest rate is usually very high
3 of 8

ways of improving cash flow

2. Short Term Bank Loan

usually offers the change for the business to take out a larger sum of money from the bank.

Benefits

  • interest rates are usually lower
  • fixed interest rate

Negatives

  • bigger finanial commitment
  • needs security in case of defaulting
4 of 8

ways of improving cash flow

3. Factoring

if a business has a significant level of credit sales and needs an immediate cash flow injection then they might consider selling those debts to another business

Benefits

  • the business will receieve approx. 80% of the value of the debts immediately
  • they will also receive a further 10% when the debts have been collected

Negatives

  • the business will lose out on about 10% of the full value of the debts
  • more expensive option than a loan
  • the customer might not be pleased about having their debt transferred and relations with them could suffer
5 of 8

ways of improving cash flow

4. Sale of Assets

the sale of non-current assets such as land, buildings and machinery can be used to raise extra cash in terms of need.

Benefits

  • assets that are rarely used can generate cash to improve cash flow
  • no interest to repay

Negatives

  • assets cannot then be used again in the future
  • may only receive a low value for the asset
  • one-off source of finance
6 of 8

ways of improving cash flow

5. Sale and Leaseback of Assets

this technique allows a business to generate short-term cash flow by selling assets to a business but then leasing them back for a fee.

Benefits

  • provide a large sum of cash quickly
  • lower repair costs as the leasing company are repsonsible for these

Negatives

  • costs of leasing will be high
  • business will own less assets which they could have used as security against future loans
7 of 8

Other Techniques for improving cash flow

  • Reduce Credit
  • Better Stock Management
  • Increase Cash Sales
  • Delay Payments to Suppliers
8 of 8

Comments

No comments have yet been made

Similar Business Studies resources:

See all Business Studies resources »See all Business Plans resources »