Consequences of Cash Flow Problems
Business: Edexcel IGCSE, topic 3.2.2
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
- 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
- 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 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.
Test yourself on Consequences of Cash Flow Problems
If a company runs out of cash, who might they be unable to pay?
What do we call organisations that loan businesses money?