Solutions to Cash Flow Problems
Business: Edexcel IGCSE, topic 3.2.4
Solutions to Cash Flow Problems
Businesses can improve their cash flow by:
Rescheduling cash payments
- A business can 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 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
- 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 other sources of finance can provide a firm with the money they need to overcome a liquidity problem.
Increasing cash inflows
- Increasing sales, chasing customers that owe money and selling assets can all increase cash inflows.
Test yourself on Solutions to Cash Flow Problems
Which of these is not a way businesses can improve their cash flow?
How can businesses improve their cash flow?
Which of the following will not increase cash inflows?
What are trade credits?