Improving Cash Flow Options to improve cash flow

Improving Cash Flow

Options to improve cash flow l Bank overdraft l An agreement whereby the holder of a current account at a bank is allowed to withdraw more money than there is in the account. The agreement specifies the maximum level of the overdraft

Bank overdraft Advantages Disadvantages l Administrative l Variable interest convenience payments l Flexibility l Higher interest rates l Interest only paid on the l Threat of immediate amount owe repayment required l No security necessary

What causes cash-flow problems? l l l l Seasonal demand Overtrading Over-investment in fixed assets (not enough working capital left) Credit sales Poor stock management Poor management of suppliers (e. g. credit periods) Unforeseen change Losses or low profits

Short-term loan l l A sum of money provided to a firm or an individual for a specific, agreed purpose. Repayment of the loan will take place within 2 years or possibly less More usually used for purchasing fixed assets, but may avert a cash-flow problem if a business is expanding rapidly

Short-term loan Advantages l Fixed interest payments make budgeting much easier l Lower interest rate than a bank overdraft Disadvantages l Higher interest payments as interest is on whole of the sum borrowed l Security is required (collateral)

Debt Factoring l l l When a factoring company buys the right to collect the money from the credit sales of an organisation Eg a factoring company may pay a firm 75% of its sales immediately + 15– 20% on receipt of the debt Firm therefore loses some revenue (5 -10%) depending on factoring company’s charge for its services

Factoring Advantages l Improved cash flow in the short term l Lower administration costs l Reduced risk of bad debts l Increased efficiency Disadvantages l Loss of revenue l High cost l Customer relations problems

Sale of assets Advantages l Can raise a considerable sum of money l Improve profitability if no longer required Disadvantages l Possibility of receiving low value for the asset if need a quick sale l Reduced ability to make a profit – fundamental rule is that a firm should not sell assets to improve liquidity

Sale of assets l When a business transfers ownership of an item that it owns to another business or individual, usually in return for cash

Sale & Leaseback l When assets that are owned by a firm are sold to raise cash and then rented back so that the company can still use them for an agreed period of time

Sale & Leaseback Advantages l Cash inflow l Flexibility l Lower costs such as maintenance l Greater focus Disadvantages l Rent – likely to pay more in the longer term l Reduced assets l Eventual loss of the use of the asset

Additional methods l l l Improved working capital control Cash management Debt management l l l l Debtors owe the business money Obtain a credit rating Managing credit control Stock management Diversity its product portfolio Improved planning, monitoring & control procedures Hold a contingency fund