Chapter 30 - Forecasting and Managing Cashflows
Lesson Objective: Managing inflows and outflows
Having Cash Flow Problems is obviously bad for businesses. But what are the main reasons causing these problems to happen in the first place?
Lower inflows and/or increased outflows:
- Poor Credit Control: sometimes payments need to be chased after;
- Long Credit Terms to customers (payables);
- Unplanned/Fast Expansions: those are costly investments that just yield revenues on the long-term;
- Unexpected Events: equipment breakdowns, steep increase in materials costs, unexpected fall in sales due to external conditions;
- Overtrading (rapid and unplanned expansion) as large outflows take place before any inflows can be made.
Activity 30.3
Business in Action 30.1 - Discussion
To improve Cash Flows, therefore, is relatively simple:
Increasing Cash Inflows
Decreasing Cash Outflows
How can a business increase inflows?
Overdraft
Short-term loans;
Sale of assets;
Sale and leaseback;
Better managing trade receivables by:
Debt factoring (selling trade receivables claims to financial institutions):
Dilemma: Although it increases inflows it involves costs and reduced the total amount amount of inflows possible.
Checking customers' credit scores:
Offer discount to customers who pay promptly:
How about improving Cash Flow by reducing outflows?
Managing trade payables can also achieve a decrease in outflows:
Purchase more supplies on credit rather than paying cash:
Dilemma: Can only be done for businesses with good credit rating. It also removes discounts from when making cash payments.
Extend the time period taken to pay suppliers:
All of these methods of either increasing inflows or decreasing outflows will ultimately have negative impacts on the business. They are, however, a necessary evil for business running into liquidity issues.
Activity 30.4
Chapter 30 - Forecasting and Managing Cashflows
To-Do-List: Data Response Question #1 (Asif Iqbal)
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