Finance Improving Cash Flow

1. FinanceImproving Cash Flow Cash 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

2. Improving Cash FlowIn this topic you will learn about: • Causes of cash flow problems • Methods of improving cash flow Revise Unit 1 Cash Flows? You will need access to the internet to watch this very short clip BUSS2.2 Improving Cash Flow

3. 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

4. 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 What were the key factors leading to the collapse of XL airlines? You will need access to the internet to watch this video clip BUSS2.2 Improving Cash Flow

5. 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 What advice would you give to businesses on managing credit sales? You will need the internet to watch this video clip Read more… Tips on how to avoid the rollercoaster effect of seasonality on your cash flow BUSS2.2 Improving Cash Flow

6. 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 Improving Cash Flow BUSS2.2 Improving Cash Flow

7. 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 collateral Read more at Business Link Read more at Business Link BUSS2.2 Improving Cash Flow

8. 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

9. 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

10. 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

11. 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 BUSS2.2 Improving Cash Flow Read more at Business Link

12. 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. • Identify the possible steps Dave could take to help solve his cash flow problem. • For each step identify an argument for and against taking that step. • Recommend 3 proposals to Dave. You should prioritise and justify your proposed solutions. BUSS2.2 Improving Cash Flow