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Cash flow

The sum of cash payments to a business (inflows) less the sum of cash payments (outflows)



When a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors



When a business cannot meet its short-term debts


Cash inflows

Payments in cash received by a business, such as those from customers (debtors) or from the bank. e.g: loans


Cash outflows

Payments in cash made by a business, such as those to suppliers and workers



Customers who have bought products on credit and will pay cash at an agreed date in the future
+ Usually big orders


Cash-flow forecast

Estimate of a firm's future cash in and outflows


Net monthly cash flow

Estimated difference bw monthly cash in and out flows


Opening cash balance

Cash held by the business at the start of the month


Closing cash balance

Cash held at the end of the month becomes next month's opening balance


Credit control

Monitoring of debts to ensure that credit periods are not exceeded


Bad debt

Unpaid customers' bills that are now very unlikely to ever be paid



Expanding a business rapidly without obtaining all of the necessary finance so that a cash-flow shortage develops



Suppliers who have agreed to supply products on credit and who have not yet been paid


Cash-flow forecasting limitations

+ Mistakes can be made in preparing revenue and costs forecasts
+ Drawn up by inexperienced staff
+ Unexpected cost increases --> inaccurate forecast e.g: Fluctuation in oil prices makes airline companies have misleading forecasts
+ Wrong assumptions being made due to e.g: poor market research


Causes of cashflow problems

+ Lack of planning
+ Poor credit control (debtors not being chased up for payment)
+ Allowing customers too long to pay debts
+ Expanding too rapidly (overtrade) --> successful and expanding but not enough cash to pay wages and materials
+ Unexpected events e.g: dip in predicted sales income, breakdown of a machines


Ways to improve cash inflows

1. Overdraft: flexible loans
+ Interest rate high
+ Can be withdrawn by the bank --> causes insolvency
2. Short-term loan: Fixed amount borrowed for an agreed length of time
3. Sale of assets: Selling off redundant assets
+ Selling assets quickly --> results in a low price
+ Assets may be necessary for future expansion
+ Could have been used as collateral for future loans
4. Sale and leaseback: Assets can be sold but can be leased back from the new owner
+ Leasing cost add to annual overheads
+ Loss of potential profit if assets rises in price
+ Can be used as collateral
5. Reduce credit terms to customers: Shortening credit terms e.g: 2 months to 1
+ Customers may purchase products from other competitive brands
6. Debt factoring: Buy the customers' bills from a business and offer immediate cash --> reduces bad debts
+ Only 90-95% of debt value will be paid by debt factoring company
+ May indicating that business is in trouble (lose reputation)


Ways to reduce cash outflows

1. Delay payments to suppliers: Cash outflows fall in short term
+ Suppliers reduce discounted offer
+ Suppliers may demand cash on delivery or refuse to supply if they see risk
2. Delay spending on capital equipment
+ Efficiency of business might fall if equipment is outdated
+ Expansion is difficult
3. Use leasing
+ Asset not owned by business--> if machines needed all the time -> costly than buying
+ Add to annual overhead
4. Cut overhead spending that doesn't affect output directly e.g Promotion costs
+ Future demand may be reduced bc product not advertised effectively


Managing debtors

+ Not extending credit to customers. Ev: lose customers potentially (marketing x finance argue)
+ Debt factorings. Ev: cost --> only use to prevent bad debt or emergency
+ Assessing whether new customers are creditworthy - use credit enquiry agency
+ Offer discount to clients who pay promptly Ev: May reduce profit margin of sale


Managing credits

+ Increasing the range of goods and services bought on credit Ev: Risky bc unpaid creditor refuse to supply --> cause production hold-ups. Also loses offer by suppliers
+ Extend the period of time taken to pay. Ev: Slow payment by larger businesses is a great burden for small businesses


Managing inventory

+ Keeping smaller inventory levels
+ Using computer systems to record sales
+ Efficient inventory control to reduce losses through damage wastage and shrinkage
+ JIT inventory ordering - working capital tied up in inventories will be minimised. More liquid.


Managing cash

+ Use of cash-flow forecasts -> arrange overdraft to avoid liquidity crisis
+ Wise investment of excess cash