Recommend and justify what can be done to improve cash flow problems
Failing to manage cash and cash flow can cause cash flow problems, or in the worst case, business failure through insolvencyWhen a business runs out of cash and can no longer pay its bills.. Even if a business has many customers, it can still have negative cash flowWhen a business has more money going out (outgoings) than money coming in. In this situation, the business can not continue to pay its bills without borrowing money or raising additional capital.. Businesses must find ways to improve cash flow to ensure this does not happen.
Three scenarios where a business can suffer cash flow problems include:
- at start-upA new business, usually only with a small number of employees., when large amounts of money need to be invested to get the business started, for example to pay for equipment, initial stock, rent, insurance, hiring, training and staff costs
- during rapid growth, when the business needs to grow quickly but cannot keep up with the cash being paid out, eg if the business needs to find larger premises and invest in making them ready to move into
- a sudden drop in the level of demand for a good or service can result in a business having a very low amount of revenue with high costs
Businesses need positive cash flowPositive cash flow is when more money comes in to the business than goes out. to reduce the risk of failure and insolvency. There are a number of ways that a business can improve their cash flow, these include:
- increase revenue – a business can try to sell more products
- reduce costs – a business may negotiate better deals with suppliers or cut back on non-essential spending
- delay payments – a business can try to delay payments on loansMoney that is given on a basis that it has to be paid back over a certain time frame with interest., mortgageA mortgage is a type of loan. It is usually a large amount of money used to pay for a property. and on trade creditThe ability to buy stock now and pay for it at a later date.
- extra funding – a business may be forced to get a business loan or apply for a grantMoney given to help a person or company that does not have to be paid back. Governments may give grants to encourage businesses to set up in particular locations.
