Cash flow problems 2.1.4
Main causes of cash flow problems are...
The profit a business makes from trading is the most important source of cash. There is a direct link between low profits or losses and cash flow problems. Most loss-making businesses eventually run out of cash, this is due to the closing balance on the cash forecast continually decreasing over the months due to an imbalance is cash flow.
2) OVER-INVESTMENT IN CAPACITY
For example, spending too much on fixed assets. This is made worse if short-term finance is used (e.g. bank overdraft). Fixed assets are hard to turn back into cash.
3) TOO MUCH STOCK
Excess stock ties up cash that the business could be using to pay off debts or use as working capital. This increases the risk of stock becoming obsolete and therefore the money too. If the stock becomes obsolete then there will not enough inflow coming into the business that would have come form the sales revenue of these products to cover the debt to the supplier that you need to pay for these now obsolete stock items. However, there needs to be enough stock to meet demand. The best solution is to bulk buy which normally leads to lower purchase prices.
4) ALLOWING CUSTOMERS TOO MUCH PROFIT
Customers who buy on credit are called "debtors". Businesses offer credit as a way of incentivising the client to purchase their goods or services because payment can be delayed to some extent. However, late payments are a common problem when businesses offer this and this can cause cash flow to become unbalanced as there is not enough inflow to cover the outflow.
5) OVER-TRADING
This occurs when a business expands too quickly, putting pressure on short-term finance. Businesses that rely on long-term contracts are also at high risk of over-trading. For example, a business expands it order book at a fast rate than access to working capital will sustain. This causes higher trade debtor figure, cash running out fast and withholding payments to suppliers. To fix this they need to reduce business activity and slow the growth of the business down to something they can handle. Introduce new share capital to ease the strain and improve the management of working capital.
6) UNEXPECTED CHANGES
Events that are not included in the cash flow forecast are those which come up unexpectedly. Internal change would be machinery breaking down or loss of key staff. An external change would be an economic downturn or an accident.
7) SEASONAL DEMAND
This is where there are predictable changes in demand and cash flow. Production or purchasing is usually done in advance of seasonal peak in demand which therefore means that cash outflows are much higher than the inflows before the peak period until sales revenue of the products start balancing the cash flow out with sufficient inflow. This can be managed; cash flow forecasts should allow for seasonal changes if the business is aware of them.
- Low profits or losses
- Over-investment in capacity
- Too much stock
- Allowing customers too much credit
- Over-trading
- Unexpected changes
- Seasonality
The profit a business makes from trading is the most important source of cash. There is a direct link between low profits or losses and cash flow problems. Most loss-making businesses eventually run out of cash, this is due to the closing balance on the cash forecast continually decreasing over the months due to an imbalance is cash flow.
2) OVER-INVESTMENT IN CAPACITY
For example, spending too much on fixed assets. This is made worse if short-term finance is used (e.g. bank overdraft). Fixed assets are hard to turn back into cash.
3) TOO MUCH STOCK
Excess stock ties up cash that the business could be using to pay off debts or use as working capital. This increases the risk of stock becoming obsolete and therefore the money too. If the stock becomes obsolete then there will not enough inflow coming into the business that would have come form the sales revenue of these products to cover the debt to the supplier that you need to pay for these now obsolete stock items. However, there needs to be enough stock to meet demand. The best solution is to bulk buy which normally leads to lower purchase prices.
4) ALLOWING CUSTOMERS TOO MUCH PROFIT
Customers who buy on credit are called "debtors". Businesses offer credit as a way of incentivising the client to purchase their goods or services because payment can be delayed to some extent. However, late payments are a common problem when businesses offer this and this can cause cash flow to become unbalanced as there is not enough inflow to cover the outflow.
5) OVER-TRADING
This occurs when a business expands too quickly, putting pressure on short-term finance. Businesses that rely on long-term contracts are also at high risk of over-trading. For example, a business expands it order book at a fast rate than access to working capital will sustain. This causes higher trade debtor figure, cash running out fast and withholding payments to suppliers. To fix this they need to reduce business activity and slow the growth of the business down to something they can handle. Introduce new share capital to ease the strain and improve the management of working capital.
6) UNEXPECTED CHANGES
Events that are not included in the cash flow forecast are those which come up unexpectedly. Internal change would be machinery breaking down or loss of key staff. An external change would be an economic downturn or an accident.
7) SEASONAL DEMAND
This is where there are predictable changes in demand and cash flow. Production or purchasing is usually done in advance of seasonal peak in demand which therefore means that cash outflows are much higher than the inflows before the peak period until sales revenue of the products start balancing the cash flow out with sufficient inflow. This can be managed; cash flow forecasts should allow for seasonal changes if the business is aware of them.
Comments
Post a Comment