3.2.4
Cash & Cash Flow 2
Consequences of Cash Flow Problems
Consequences of Cash Flow Problems
A business having persistent negative cash flows is unlikely to be sustainable. The business will eventually run out of money and will not be able to pay for salaries, rent or raw materials. In the short-term, negative cash flows can cause problems with stakeholders:


Employees
Employees
- If a firm runs out of cash, it may be unable to pay its employees.
- If employees are worried about cash, this can have a negative impact on employee motivation and they may leave the firm.


Suppliers
Suppliers
- If a business runs out of cash, it may not be able to pay its suppliers.
- This could create a temporary halt (stop) in production. It may also damage the relationship between the business and suppliers.


Creditors
Creditors
- Creditors are organisations (or people) that have loaned a business money. If a business runs out of cash, it may not be able to repay these loans.
- If this happens, the business may not be able to get loans (finance) in the future or it may pay a higher interest rate.
Solutions to Cash Flow Problems
Solutions to Cash Flow Problems
Businesses can improve their cash flow by:


Rescheduling cash payments
Rescheduling cash payments
- A business could delay payment to suppliers via things like trade credits.
- If a business predicted negative cash flow in February but a positive one in March, it may be able to delay the payment until March.


Overdrafts
Overdrafts
- Overdrafts allow a business to have a negative current account balance in the short-term.
- Banks effectively provide “bridging finance” to plug a short-term shortfall (or lack) of cash.


Reducing cash outflows
Reducing cash outflows
- A business can try to reduce cash outflows if they predict a liquidity problem.
- Delaying the payment of bills is one way to do this. For example, a business change the payment dates for loans and try to secure trade credits.
- Forecasts are useful because the earlier a company predicts a cash shortfall, the better they can adjust their cash payments.


Finding new sources of finance
Finding new sources of finance
- Finding other sources of finance can provide a firm with the money they need to overcome a liquidity problem.


Increasing cash inflows
Increasing cash inflows
- Increasing sales, chasing customers that owe money and selling assets can all increase cash inflows.
1Exploring Business
1.1Features of Business Organisations
1.2Organisation of Businesses
1.3Business Environment
1.3.1External Influences
1.3.2Political & Legal Change
1.3.3Economic Environment
1.3.4Social & Technological Environment
1.3.5Lifestyle & Technological Environment
1.3.6Corporate Social Responsibility
1.3.7The Competitive Environment
1.3.8Innovation
1.3.9Risk & Uncertainty
1.3.10Porter's Five Forces
1.3.11SWOT Analysis
2Marketing Campaigns
2.1Marketing
3Business Finance
3.1Sources of Finance
3.2Financial Planning
3.3Financial Statements
4International Business
4.1Globalisation
4.2International Business
4.3International Economic Environment
4.4Factors Affecting International Business
5Principles of Management
5.1Management & Leadership
5.2Theories of Motivation
6Business Decision Making
6.1Business Principles & Practices
6.2Quality Management
6.3Human Resources
6.4Documents & Business Decisions
Jump to other topics
1Exploring Business
1.1Features of Business Organisations
1.2Organisation of Businesses
1.3Business Environment
1.3.1External Influences
1.3.2Political & Legal Change
1.3.3Economic Environment
1.3.4Social & Technological Environment
1.3.5Lifestyle & Technological Environment
1.3.6Corporate Social Responsibility
1.3.7The Competitive Environment
1.3.8Innovation
1.3.9Risk & Uncertainty
1.3.10Porter's Five Forces
1.3.11SWOT Analysis
2Marketing Campaigns
2.1Marketing
3Business Finance
3.1Sources of Finance
3.2Financial Planning
3.3Financial Statements
4International Business
4.1Globalisation
4.2International Business
4.3International Economic Environment
4.4Factors Affecting International Business
5Principles of Management
5.1Management & Leadership
5.2Theories of Motivation
6Business Decision Making
6.1Business Principles & Practices
6.2Quality Management
6.3Human Resources
6.4Documents & Business Decisions
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