What is overtrading?
overtrading is when a business expands to fast, without organising the funds for the expansion, resulting in cash flow problems.
Allowing to much trade credit.
giving a business the goods they need but giving them 60 to 90 days to pay for the goods provided.
Poor Credit Control.
Poor Credit control ensures customers keep to agreed borrowing limits and pay on time. if this is inefficent then cash flow problems will develop.
incorrect forecasts can be caused by a number of reasons. These are as follows.
- Wrong values used, incorrect predictions.
- inexperienced person creating the forecast.
- unexpected costs, for example, damage to the building, damage to machines.
Improving cash flow.
there are a number of ways to improve cash flow. these are.
improved control of working captial, work capital are funds available to trade and operate the business daily.
negotiate improved terms of trade credit, allows for delayed payments to improve cash position.
offer less trade credit, would improve cash flow position but could result in loosing customers.
debt factoring, a company which collect your unpaid invoices for you, but keep a large percentage due to the risks involved.
arrange short term borrowing, such as an overdraft from the bank to allow for the business to access money if needed.
sale and lease back, this is when a business sells assests such as a building or machinery, they then lease this back from the person who bought it from them.
Benefits of good cash flow.
A business can benefit in a number of ways from effective and careful management of cash flow.
- reduced borrowing costs, due to the increasing costs.
- good relationship with suppliers.
- good public relations.
More ways of identifying cash flow problems.
- Customers finances and behaviour.
- changes in the market conditions.
- using a financial forecast.
Analysis in cash flow questions.
issues for analysis when considering cash flow questions include.
- considering a business's cashflow forecast including relationships between cash inflow and outflow forecast.
- establishing the causes of a paticular business's cashflow difficulties.
- explaining actions a business may take to improve cash flow positions.
issues for evaluation when considering cash flow questions include.
- to what extent should a manager be concerend about a paticular cash flow position.
- what is the major cause of a business's cash flow diffuclties.
- what are the implications for a business resulting from effective management of its cash flow.
do use numerical and written evidence when considering a business's cash flow position. the numbers will show a trend, which ultimately might be improving or getting worse. however, there may also be important snippets of information in the case study, this may help to judge the major cause of cash problems or the most effective action that managers may take in response.