CAUSES OF CASH FLOW PROBLEMS UNIT 3.3 WORKING CAPITAL

CAUSES FOR CASH FLOW PROBLEMS CAUSES Overtrading or expanding quickly Over borrowing Overstocking Poor credit control Unforeseen changes Lack of planning

DEALING WITH LIQUIDITY PROBLEMS Improving the cash flow position of a business requires effective working capital management. This means controlling CURRENT ASSETS AND CURRENT LIABILITIES 3 methods for dealing with liquidity problems: 1.Find other sources of finance 2.Improve cash flows 3.Reduce cash outflows

WAYS TO IMPOVE CASH FLOWS Alternative sources of finance Overdrafts Sale and leasebacks Selling fixed assets Debt factoring Government assistance Growth strategies – eg: merging, joint ventures, alliances

WAYS TO IMPOVE CASH FLOWS CASH INFLOWS Tighter credit control Cash payments only Changing pricing policy Improved product portfolio Improve marketing planning CASH OUTFLOWS Seek better credit terms Seek alternative suppliers Better stock control Reduce expenses

OTHER METHODS Focus on minimize the risk and impacts of cash flow problems on the business Spread the risk by having wider customer base Send out demand payments for partial payments on certain dates Establish systems to pay bills regularly and in installments Ensure quality management systems are in place

LIMITATIONS OF CASH FLOW FORECASTING Predicting cash flow can be very hard because it is based on certain assumptions. Therefore inaccuracies can occur due to any internal and external reasons.

INTERNAL SHOCKS Internal Reasons Marketing Human Resources Operations Management

External Factors Competitors Changing fashions and tastes Economic changes External Shocks EXTERNAL REASONS