a cash deficit and reducing the size of its closing cash. If this is temporary, a business could use its savings to pay its bills or it could borrow some finance for a short period of time until cash flow improves. If negative cash flow is happening regularly, spending needs to be controlled by cutting back on non-essential (discretionary) items. Cash flow forecasts can act as an early warning system of possible future financial problems.
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Support an application for a bank loan. When borrowing money, banks will look for a cash flow forecast to assess a business’s ability to repay the loan. Such forecasts will reassure banks and investors that a business is being well managed.
LO 2.11
Did you know? Seasonal products like ice cream cones, Christmas trees and Easter eggs generate uneven cash flow.
4. What can a business do if it has cash flow problems? It is essential for all businesses to manage their cash flow to ensure they have
sufficient cash to meet their debts. The main ways to solve ongoing cash flow problems are to: Increase income • Look for ways to increase sales. • Sell off slow-moving stocks to convert them into cash by putting them on sale.
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• Increase prices and profit margins on popular products to raise more money.
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• Raise more finance by selling shares or getting a long-term loan. Reduce payments • Cut back on non-essential costs. • Buy from cheaper suppliers of stock and raw materials. • Only employ temporary staff to cope with busy periods. Retailers commonly do this in the weeks before Christmas.
• Outsource work such as accounting and web design to cheaper suppliers instead of employing your own staff.
• Maintain proper credit control. Many businesses sell goods on credit to entice customers and increase sales and profits. Credit means selling goods now but not getting paid until later. Businesses need to ensure that they only give credit to reliable customers who will pay on time. Credit control means monitoring which customers are given credit and for how long, and ensuring they pay up on time.
