cashflow management - strategies (finance)

Question 1

What falls under cash flow management

Answer 1

• cash flow statements
• distribution of payments
• discount for early payments
• factoring

Question 2

Cashflow statements

Answer 2

Monitor the business’s cash inflows and cash outflows over a period of time (usually a month)

• shows if the business has enough money to cover its debts and pay its creditors
• helps keep track of the business’s cash flow and the areas it is spent or received in over a month

Question 3

What is the distribution of payments

Answer 3

Where the business delays their outflows until they are due to ensure that the cash balance is stable and not constantly fluctuating

• businesses should distribute their payments on alternate weeks in a fortnight eg pay employees on one week and suppliers the other

Question 4

advantages and disadvantages of distributing payments

Answer 4

ADVANTAGES:
- allows for the business to maintain a constant stable cashflow

• the business is able to have a good credit rating if the amount remains stable - allows them to easily apply for loans

DISADVANTAGES:
- the business may have to pay more in the long term eg if they pay their suppliers in one sum they may be offered a discount

• may not be suitable towards suppliers and staff
• difficult to time payments due to unexpected expendses

Question 5

discount for early payment

Answer 5

where the business offers its customers a discount if they pay before the legal due date

• This allows them to receive their inflows faster and also guarantees a deal

Question 6

Advantages and disadvantages - discount for early payment

Answer 6

ADVANTAGES:
- the business is able to offer a discount for the customers next purchase (encourages business boosting profits in the long term)

• encourages cash inflows

DISADVANTAGES:
- can impact long term profitability (less cash = less profits)

• may interfere with pricing strategies ie marketing
• sends a bad message to debtors

Question 7

what is factoring

Answer 7

Where the business sells off its debtors to a factoring company for a discounted price in order to gain instant cash inflow

Question 8

Advantages and disadvantages of factoring

Answer 8

ADVANTAGES:

• The business is able to receive cash
• The business does not have to worry about the collection of accounts

DISADVANTAGES:

• Depending on the commission rate of the company it may be more expensive than paying interest on a form of debt finance
• looses money (profits)