Reasons for cash flow and working capital problems…. (lead to
financial crisis or financial problems)
Investing too much in fixed asset
Holding too much stock
Overtrading
Seasonal fluctuations
Giving too much credit
Using too much credit
Unexpected events
Further explanations on reasons of cash flow problems/liquidity crisis in biz:
1. Investing too much in fixed assets: wasting on biz money purchased on
unnecessary/expensive assets. no cost analysis made before making choice to buy.
2. Holding too much stock: high amount of stocks still available in biz and not selling
yet. Keeping stocks for longer time can make biz comfort with loss due to stock
obsolete.
3. Overtrading: produce large amount of product and not based on budgeting.
Eventually the overproduction of products cannot be sold since less demand from
customer n market. (bear with the loss due to too many stocks/no revenues can be
obtained from the stock)
4. seasonal fluctuations: relates to product type that having demand in specific
season/time. When out of season period, biz cannot get sales income. (depending on
season/festivals where the stocks are out of the seasons or festivals due to specific
products/specific demands)
5. giving too much credit: high amount of credit and long-term credit period given to
customers make the biz to wait for long time to get on repayment.
6. using too much credit: high amount of debt having in business will affect in business
financial capability.
7. unexpected events: risk and condition that cannot be predicted and controlled by
business can impact on biz operation and financial stability. For example, economic
downturn, bad debt risk. (precautionary step made by the business to prevent
unexpected situation)
Resolving a liquidity crisis…
Chase debtors
Cut cash outflow
Debt factoring
Delay payments
Increase cash flow
Overdraft
Bank Loan
Sale and leaseback
Sell unused assets (sales of assets)
Further explanations on resolving methods to improve on biz liquidity crisis:
1. Chase debtors: get the payment from debtors to increase on biz cash inflow
2. Cut cashflow: reduce on biz expenses so that less amount to be paid (remove
unnecessary expenses/can have surplus money
3. debt factoring: selling the biz current debtors and gain on immediate money
4. Delay payments: delay payments to creditor and suppliers so that some money can
still be retained in biz (long-term repayment to suppliers or creditors)
5. increase cash flow: by doing more sales promotion to earn on sales income (gain on
sales revenues)
6. overdraft: get short term loan from bank to cover on urgent expenses that must be
settled
7. bank loan: get assistance from bank for money that can be used improving biz
financial problem. Interest and repayment will be fixed that biz can plan. (a huge
amount money to solve financial crisis)
8. sales and lease back: sell biz assets to get on funds and leasing back the assets if need
to be used in biz. (if need urgent money)
9.sell unused asset: selling on available assets having in biz and get cash from the sales
made (sell the asset and gain the money)
Budgeting
The basic framework of budgeting:
What is budget?
-detail detailed quantitative planning
Budgetary control
To ensure whatever you have planned
Planning
-have to develop objectives or goals (budgeting)
-in order to achieve it
Control
-whatever you already planned when it is happened (you monitored)
-have to analyze and review to the plan situation
Resolving bottlenecks problems
Bottlenecks may be resolved by increasing capacity utilization, finding new suppliers,
automating labor processes, and creating better forecasts for consumer demand.
Responsibility accounting
responsibility accounting: specific manager responsible to specific department
Examples: sales manager=sales department, production manager= production
department, account manager= account department
Self-imposed budget (participative budget)
-the budget preparation is being prepared from managers at all the levels)