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Improving Cash Flow
Key issues for this topic ,[object Object],[object Object],[object Object]
A Reminder from Unit 1 Cash inflows Cash outflows Cash sales Payments to suppliers Receipts from trade debtors Wages and salaries Sale of fixed assets Payments for fixed assets Interest on bank balances Tax on profits Grants Interest on loans & overdrafts Loans from bank Dividends paid to shareholders Share capital invested Repayment of loans
Why Businesses Need Cash Finance is needed for
 Business Set-up Day-to-day trading (working capital) Growth
A Typical Cash Flow Cycle Stocks ordered from supplier Production turns stocks into products Products sold to customers Customers pay for their purchases Stocks held until a customer is found Outflow - cash paid to suppliers & employees Inflow – cash paid by customers
The cash flow operating cycle ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
What is cash flow problem? When a business does not have enough cash to be able to pay its liabilities
Main Causes of Cash Flow Problems ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Profit = most important source of cash ,[object Object],[object Object],[object Object]
Over-investment in capacity ,[object Object],[object Object],[object Object]
Too much stock? ,[object Object],[object Object],[object Object],[object Object],[object Object]
Allowing Customers Too Much Credit ,[object Object],[object Object],[object Object],[object Object],[object Object]
Overtrading (1) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Overtrading (2) Cause Business expands its order book at a faster rate than access to working capital will sustain Symptoms Higher trade debtor figure Cash running out Withholding payments to suppliers Actions Reduce business activity – slow growth down Introduce new share capital to ease the strain Improve the management of working capital
Unexpected changes ,[object Object],[object Object],[object Object],[object Object],[object Object]
Seasonal demand ,[object Object],[object Object],[object Object]
Handling Cash Flow Problems
How to Handle Cash Flow Problems ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Importance of Good Cash Flow Forecasts ,[object Object],[object Object],[object Object],[object Object],[object Object]
Managing Working Capital Stocks Debtors Creditors Focus on
Improving working capital Debtors Amounts owed by customers Creditors Amounts owed to suppliers Stocks Cash tied up in stocks
What is working capital? ,[object Object],[object Object]
Why working capital is important ,[object Object],[object Object],[object Object],[object Object]
Working capital needed depends on ,[object Object],[object Object],[object Object],[object Object],[object Object]
A lack of working capital means
 ,[object Object],[object Object],[object Object],[object Object],[object Object]
Dealing with working capital shortages ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Managing debtors better ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Debt factoring ,[object Object],[object Object],[object Object],[object Object],[object Object]
What is credit control? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Trade creditors ,[object Object],[object Object],[object Object],[object Object],[object Object]
Managing Stocks ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Cash management ,[object Object],[object Object],[object Object],[object Object],[object Object]
Improving the cash position ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Should selling prices be discounted? ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Bank overdraft v Bank loan ,[object Object],[object Object],[object Object]
Bank overdraft v Bank loan Bank Overdraft Bank Loan Advantages Relatively easy to arrange Greater certainty of funding, provided terms of loan complied with Flexible – use as cash flow requires Lower interest rate than a bank overdraft Interest – only paid on the amount borrowed under the facility Appropriate method of financing fixed assets Not secured on assets of business Disadvantages Can be withdrawn at short notice Requires security (collateral) Interest charge varies with changes in interest rate Interest paid on full amount outstanding Higher interest rate than a bank loan Harder to arrange
Sale of assets ,[object Object],[object Object],[object Object]
Sale and Leaseback ,[object Object],[object Object],[object Object],[object Object]
Test Your Understanding http://www.tutor2u.net/business/quiz/improvingcashflow/quiz.html
Improving Cash Flow

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Aqa bus2-improvingcashflow

  • 2.
  • 3. A Reminder from Unit 1 Cash inflows Cash outflows Cash sales Payments to suppliers Receipts from trade debtors Wages and salaries Sale of fixed assets Payments for fixed assets Interest on bank balances Tax on profits Grants Interest on loans & overdrafts Loans from bank Dividends paid to shareholders Share capital invested Repayment of loans
  • 4. Why Businesses Need Cash Finance is needed for
 Business Set-up Day-to-day trading (working capital) Growth
  • 5. A Typical Cash Flow Cycle Stocks ordered from supplier Production turns stocks into products Products sold to customers Customers pay for their purchases Stocks held until a customer is found Outflow - cash paid to suppliers & employees Inflow – cash paid by customers
  • 6.
  • 7. What is cash flow problem? When a business does not have enough cash to be able to pay its liabilities
  • 8.
  • 9.
  • 10.
  • 11.
  • 12.
  • 13.
  • 14. Overtrading (2) Cause Business expands its order book at a faster rate than access to working capital will sustain Symptoms Higher trade debtor figure Cash running out Withholding payments to suppliers Actions Reduce business activity – slow growth down Introduce new share capital to ease the strain Improve the management of working capital
  • 15.
  • 16.
  • 17. Handling Cash Flow Problems
  • 18.
  • 19.
  • 20. Managing Working Capital Stocks Debtors Creditors Focus on
  • 21. Improving working capital Debtors Amounts owed by customers Creditors Amounts owed to suppliers Stocks Cash tied up in stocks
  • 22.
  • 23.
  • 24.
  • 25.
  • 26.
  • 27.
  • 28.
  • 29.
  • 30.
  • 31.
  • 32.
  • 33.
  • 34.
  • 35.
  • 36. Bank overdraft v Bank loan Bank Overdraft Bank Loan Advantages Relatively easy to arrange Greater certainty of funding, provided terms of loan complied with Flexible – use as cash flow requires Lower interest rate than a bank overdraft Interest – only paid on the amount borrowed under the facility Appropriate method of financing fixed assets Not secured on assets of business Disadvantages Can be withdrawn at short notice Requires security (collateral) Interest charge varies with changes in interest rate Interest paid on full amount outstanding Higher interest rate than a bank loan Harder to arrange
  • 37.
  • 38.
  • 39. Test Your Understanding http://www.tutor2u.net/business/quiz/improvingcashflow/quiz.html