Improving Cash Flow

• 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.

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.

1. Bank Overdrafts

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• can be withdrawn by the bank at very short notice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

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

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

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

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

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