BUSS2.2 Improving Cash Flow

Finance

Improving Cash FlowCash Flow

This unit follows on from the study of cash flow in Unit 1- Using Cash Flow Forecasting

“Happiness is a positive cash flow”Fred Adler

BUSS2.2 Improving Cash Flow

Improving Cash FlowIn this topic you will learn about:

Causes of cash flow problems

Methods of improving cash flow

Revise Unit 1

Cash Flows?

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BUSS2.2 Improving Cash Flow

Cash Flow Problems Businesses need to have sufficient cash to meet

day to day finances Buying stock Paying wages Utility bills

Insufficient liquid cash funds may mean an inability to meet short term debts Bank overdraft Trade creditors

Limited cash may result in missed opportunities

BUSS2.2 Improving Cash Flow

Cash Flow Problems A key consideration should be whether the

cash flow problem is short term or long term A firm may be able to survive short term cash

flow problems Long term cash flow problems may be

insurmountable

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What were the key factors leading to the collapse of XL airlines?

BUSS2.2 Improving Cash Flow

Causes of cash flow problems Credit Sales

Long payment terms Poor credit control

Overtrading Additional overhead and day to day expenses Increased capital expenditure

Internal management Stock control Relationship with suppliers Poor or inaccurate planning

Seasonality Unexpected events

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What advice would you give to businesses on managing credit sales?

Read more…Tips on how to avoid the

rollercoaster effect of seasonality on your cash flow

BUSS2.2 Improving Cash Flow

Improving Cash Flow Increasing the volume

of the inflow of cash Speeding up the

timing of the inflow of cash Inflows

Capital invested Loans Cash sales Debtor payments

Reducing the volume of the outflow of cash

Slowing down the timing of the outflow of cash Outflows

Loan repayments Day to day running

expenses Interest payments

BUSS2.2 Improving Cash Flow

Improving Cash Flow - Inflows Using financial institutions i.e. banks

Overdraft – an arrangement with the bank allowing the business to withdraw money above the amount available

Provides some financial peace of mind Backed by a cash flow forecast to show ability to repay Allows flexibility Incurs interest and possible arrangement fee Can be ordered to repay immediately

Short-term loan – an arrangement with a bank to lend money for a set period of time

Pre agreed repayment terms Incorporated into budget and cash flow Interest rate may be lower than an overdraft Interest is paid on the total value of the loan May need to be backed by collateralRead more at

Business Link

Read more at Business Link

BUSS2.2 Improving Cash Flow

Improving Cash Flow - Inflows Factoring

Debt Factoring – the process of selling a business’ debts to a factor house at a reduced amount in order to receive immediate payment.

Immediate payment of debt Reduced risk of non payment (bad debt) Factor house takes a % as their profit May alter customer’s image of business

Read more at Business Link

BUSS2.2 Improving Cash Flow

Improving Cash Flow - Inflows Sale of Assets

Sale of Assets – turning an obsolete asset into cash Potentially quick cash injection Asset must be no longer needed Loss of future use or value of asset Possible low value received One off action

Sale and Leaseback – turning an asset into cash whilst still being able to use it through a lease agreement

Quick cash inflow in the short term Reduced value of business’ assets Larger cash outflow in the long term

Tui travel sell 19 aircrafts

BUSS2.2 Improving Cash Flow

Improving Cash Flow - Inflows Cash payments from customers

Reducing credit terms – credit terms refers to the amount of time a customer is given to pay for their goods and services. Some businesses offer customers a discount for immediate or quick payment

Quick cash inflow Reduced risk of bad debt May need to offer a discount May lose customers

Credit control – the process of chasing payments from debtors (people who have bought from you on credit)

Brings cash into the business Full amount received May alienate customers Administratively demanding You will need the

internet to watch this video clip

BUSS2.2 Improving Cash Flow

Improving Cash Flow - Outflows Delaying payment to suppliers

Negotiating longer payment terms May incur penalties Need to maintain positive relationship

Stock management Reducing money tied up in stock Need reliable stock deliveries

Reduce overhead spending Cut unnecessary expenditure Should not have negative impact on productivity Consider any knock on effect on sales

Read more at Business Link

BUSS2.2 Improving Cash Flow

Activity – Dave’s Direct Deliveries

Dave started his courier business 3D Ltd 5 years ago. It currently operates with a fleet of 8 trucks and 2 bikes. Over the past year however things have got tough; rising fuel prices, increased road tax and falling customer numbers have meant he has had to reduce his drivers from 8 to 5, all of whom are paid on a weekly basis.

Dave already has a bank loan for £50000, the repayment on which has also gone up recently due to a rise in interest rates. Last month two of his regular customers cancelled their contracts, one of whom still owes him £6000. Both explained that they were moving to cheaper competitors who offered 45 day payment terms compared to Dave’s 30 days. Dave’s wife Doris helps out on a part time basis in the office where she answers the phone, sends invoices and keeps the financial records of payments and expenditure.

Dave is worried, his bank balance is nearly zero and if things don’t improve in the next 3 months he is anxious he will have serious cash flow problems and not be able to meet his day to day running costs.

1) Identify the possible steps Dave could take to help solve his cash flow problem.2) For each step identify an argument for and against taking that step.3) Recommend 3 proposals to Dave. You should prioritise and justify your proposed

solutions.