Cash flow management

1. Improving cash flow
 The actions that small and medium-sized
businesses can take to improve their cash flow
position
 The ways that careful management of cash flow
can improve a business’s performance

3. Causes of cash flow
problems
 Overtrading: expanding too quickly without organising
funds to finance the expansion
 Too much trade credit: customers have too long to pay
delaying cash inflows
 Poor credit control: not chasing up late payments or giving
trade credit to unreliable customers

4. Incorrect CF forecasts
 Inaccurate assumptions: sales lower, payments
slower than expected;
 Unexpected costs: price of imported materials
rises, new tax/duty, mechanical breakdowns;
 Inexperience: new business, product or market

5. The causes of cash variances
 One-off e.g. cancelled order
 Seasonal variations
 Continuing trend of falling or rising
sales
 Self-correcting e.g. slump followed
by a surge (e.g. following change in
marketing tactics by firm or rival): no
action needed

6. How to improve cash flow:
control working capital
 Distribution of Payments - Negotiate improved
terms for trade credit
 Discounts for early payments - Offer less trade
credit
 Debt factoring.
The aim is to increase the finance
available to the business for its day-to-
day trading activities.

7. Benefits of good cash-flow
management
 Reduced borrowing costs: going over your
overdraft limit incurs a financial penalty;
 Good relations with suppliers: prompt
payments may lead to lower prices;
 Public relations: customers may lose
confidence if a firm is desperate for
payment

8. Advice for the exam
 Identify the most appropriate
methods of improving cash flow for
the business described in the scenario.
It’ll be different in each case
 Look for clues e.g. information about
trade credit, the availability of assets
and bank loans. This will help to
establish the cause or most
appropriate action to take
 Use the financial information to
support/illustrate your answer e.g.
identify a trend

9. Analysis
 Discuss the business’s cash flow forecast including the
relationship between cash inflow and outflow variances
 Establish the causes of a particular firm’s cash flow
difficulties
 Explain actions that business may take to improve their
cash position and how the actions will help

10. Evaluation
 To what extent should a manager be concerned
about a particular cash-flow position?
 What is the major cause of a business’s cash-flow
weakness or strength?
 What are the implications for a business resulting
from effective management of its cash flow?

11. Questions:
 Patane Motorcycle Tours runs both short and long trips
throughout the year, although the warmer months, from
September to April, generate the most revenue. Cash flow
problems often arise in July as repairs are carried out on the
bikes, and registration and insurances fall due. Propose ways
for Patane Motorcycle Tours to manage their cash flow.
 Judith runs a landscape gardening business and has come to
you for financial advice. You find that she is reluctant to offer
discounts for cash. Explain the reasons for and against
offering discounts for cash and recommend some financial
advice for Judith’s business.