Solving Cash Flow Problems
Unsurprisingly, cash flow problems are the main cause of
business failure and can even put an end to businesses that
are regarded as highly successful.
Most small businesses experience cash flow problems from
time to time and urgently need working capital. The
owner's normal jump to an immediate solution "I'll have to
ask the bank for an overdraft" rather than considering the
other options available. In fact the cash you need might
already be there-locked up in stock, assets or your debtors'
book. Below are some suggestions to increase working
capital.
Internal sources of finance - Most business owners
immediately think of the bank or loans when they're short
of cash. But there are many more resources you can tap
before you ask for that expensive overdraft or for an
overdraft extension. You can often free up funds from
within your business by re-examining your business.
Assets - Your assets include debtors, stock, vehicles, plant
and equipment, fittings and property. Each of these is a
possible source of funds.
1.
Debtors - Are you letting some customers have the
free use of your cash for months? This is a common
occurrence in small businesses where the owner are
so busy getting the business off the ground, products
out the door, or services completed, that they don't
pay enough attention to basic business procedures.
Many customers will take advantage of this 'free cash'.
But your business is not to be a free bank.
Here's how you fix the problem:
 Get invoices out promptly. Whatever else you do,
become efficient at getting invoices out early. This is
your future cash flow! You want to receive it as soon as
possible.
 Follow up promptly when invoices aren't paid by due
date. Be polite but firm. If you haven't the time to do
this yourself, then appoint someone to do it for you.
 Consider offering a discount for prompt payment.
2.
Stock - Do you have excessive capital tied up in stock?
This can occur in two ways:
 Carrying high levels of items that you could obtain from
suppliers at short notice
 having too many slow-moving items (and too few fastmoving items).
A quick sale? - Can you free up cash by reducing stock?
What about selling the slow-moving lines or having a quick
sale of the slow-moving stock? It might pay you to reduce
some items quite heavily to get some cash in quickly.
3.
Sell Fixed assets - Fixed assets can often be the source
of a significant amount of cash. Do you really put all
your assets to full use? You might be able to sell off
little-used assets and hire suitable replacements when
you require them. You might be able to sell vehicles
and lease others instead.
4.
Ask Suppliers for better terms - Finally, consider your
suppliers as a possible source of funds. Ask for
extended payment terms to give you the opportunity
to sell the goods first before you have to pay.
Glossary Activity – Create definitions/descriptions of the
words in italics and underlined.
The immediate solution to Cash Flow Problems
1. An overdraft is said to be an immediate solution to cash
Flow Problems – what is an overdraft?
An overdraft allows you to borrow an agreed amount
of money on top of your bank balance. Depending
on the bank, you may pay interest or fees - or both in return. Breaking your agreed limit will turn the
authorised overdraft into an unauthorised one and
incur penalty charges as well as (normally high rates
of) interest on the additional amount.
2. Fully explain why an overdraft might have a negative
effect on the business.
What is a Full Explanation - Students make connections
between facts and theory and discuss impacts, effects or
consequences on the business.
This means that you have to relate the answer to how it
might affect the business’s
Profits – Revenue, costs or expenses.
Capital – Assets and liabilities.
The four other solutions to Cash Flow Problems
1. Create a timeline to show which of the five solutions
(including an overdraft) will have the quickest affect on
cash flow.
2. Four possible solutions to cash flow problems are
described. For each: Describe how it will solve the cash flow problem.
 Fully explain why the solution might have a negative
impact on some other area of the business.