Unit 5 - D1 Cash flow problems

 Actions to be taken when experiencing cash
flow problems
 Potential dangers to a business due to poor
financial management.

, A
A cash
cash flow
flow problem
problem occurs
occurs when
when a a business
business hashas low
low cash
cash levels.
levels. Therefore,
Therefore, it
it does
does not
not have
have
Solutions to Cash Flow
enough
enough cash
they
cash to
become
to be
due.
be able
able to
The
to pay
pay its
profit
its liabilities
which
liabilities and
a business
and for
for example,
makes
example, struggles
is the
struggles to
most
to pay
pay its
important
they become due. The profit which a business makes is the most important source of cash
its debts
source
debts as
of cash
as


Problems
and
and if
if this
business
this is
is affected,
does
affected, it
not have
it will
will have
healthy
have aa direct
direct impact
figures,
impact on
problems
business does not have healthy figures, problems may arise.
on cash
may
cash flow
arise.
flow problems.
problems. As As aa result,
result, if
if a
a

Nevertheless,
Nevertheless, these
these issues
issues can
can be
be dealt
dealt with
with easily,
easily, with
with the
the appropriate
appropriate strategy.
strategy. When
When
facing
facing a a decrease
decrease in in cash
cash flow,
flow, aa business
business owner
owner oror manager
manager mustmust successfully
successfully identify
identify
funding
funding options
options inin order
order toto keep
keep the
the business
business running.
running.

Initially,
Initially, when
when a a business
business offers
offers credit
credit to
to debtors,
debtors, it
it is
is a
a good
good way
way toto build
build up
up revenue.
revenue.
However,
However, it has to take into consideration that this involves an element of risk, as if
it has to take into consideration that this involves an element of risk, as if there
there is
is
late payment, this can put a strain on the business. As a result, it has
late payment, this can put a strain on the business. As a result, it has to come up with to come up with
strategies
strategies toto regulate
regulate such
such types
types ofof payments.
payments. For For instance,
instance, the
the manager
manager of of a
a business
business
could ask to perform credit checks on potential debtors with whom they plan to
could ask to perform credit checks on potential debtors with whom they plan to do significant do significant
transactions.
transactions. This
This will
will enable
enable the
the business
business to
to ensure
ensure that
that the
the latter
latter has
has the
the capability
capability toto pay
pay
it back.
it back.

The
The business
business should
should also
also monitor
monitor invoices
invoices closely
closely and
and contact
contact debtors
debtors regularly
regularly about
about late
late
payments. In extreme cases, the business should even stop dealing with those
payments. In extreme cases, the business should even stop dealing with those who exceed who exceed
their
their credit
credit limit.
limit. Moreover,
Moreover, the
the business
business could
could also
also offer
offer cash
cash discounts
discounts to
to encourage
encourage early
early
payments.
payments. The objective of this strategy is to obtain payment from debtors as fast as
The objective of this strategy is to obtain payment from debtors as fast as
possible. This eventually improves cash flow and minimises the risk of bad
possible. This eventually improves cash flow and minimises the risk of bad debts. debts.

Another
Another effective
effective solution
solution against
against cash
cash flow
flow problems
problems is is by
by making
making sure
sure that
that suppliers
suppliers are
are
reliable. There has to be an agreement to guarantee that all goods will be
reliable. There has to be an agreement to guarantee that all goods will be supplied on time supplied on time
to
to keep
keep the
the business
business inin good
good working
working condition.
condition. Also,
Also, if
if possible,
possible, the
the business
business should
should try
try to
to
persuade suppliers to maintain fixed prices or at least provide notices of proposed
persuade suppliers to maintain fixed prices or at least provide notices of proposed increases increases
in
in price
price of
of their
their goods.
goods. Furthermore,
Furthermore, sometimes
sometimes suppliers
suppliers maymay also
also face
face financial
financial difficulties
difficulties
and
and thus, they may decide to tighten payment terms. Therefore, I would recommend that
thus, they may decide to tighten payment terms. Therefore, I would recommend that
the business should stay on the safe side by keeping a list of alternative suppliers
the business should stay on the safe side by keeping a list of alternative suppliers and avoid and avoid
relying
relying on
on aa single
single trader.
trader.