Improving Cash Flow
- Created by: anna_levin
- Created on: 12-05-16 15:12
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- Improving Cash Flow
- Key Terms
- Creditors: suppliers owed money by the business - purchases have been made on credit
- Credit control: the monitoring of debts to ensure that credit periods are not exceeded
- Bad debt: unpaid customer bills that are now very unlikely to ever be paid
- Overtrading: expanding a business rapidly without obtaining all of the necessary finance so that a cash flow shortage develops
- Causes of cash flow problems
- Lack of planning
- Poor credit control
- Allowing customers too long to pay debts
- Overtrading
- Unexpected events
- Ways to improve cash flow
- Increase cash inflows
- Overdraft
- High rayes of interest
- Can be withdrawn by the bank, causes insolvency
- Short-term loan
- Interest costs
- Must be repaid in time
- Sale of assets
- If done quickly can result in low price
- May be required at a later date for expansion
- Could have been used as collateral for future loans
- Sale and leaseback
- Annual overheads
- Loss of potential profit is asset rises in price
- Could have been used as collateral for future loans
- Reduce credit terms to customers
- Weakness against competition
- Debt factoring
- Reduces profit - only receive 90-95% of debt
- Impact on reputation when debt is collected from customer by a finance business
- Overdraft
- Reduce cash outflows
- Delay payments to suppliers (creditors)
- Suppliers may reduce any discount offered with the purchase
- Suppliers may insist on cash upon delivery or refuse to supply at all
- Delay spending on capital equipment
- Efficiency of business may fall if old equipment isn't replaced
- Expansion becomes difficult
- Use leasing not outright purchase of capital equipment
- Asset isn't owned by business
- Interest and annual overheads
- Cut overhead spending that does not directly affect output, e.g. promotion costs
- Future demand may be reduced due to lack of promotion
- Delay payments to suppliers (creditors)
- Increase cash inflows
- Key Terms
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