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Unit 5 -M1:the cash flow problems a business might experience.
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In this assignment, I will analyse the cash flow problems a business mightexperience. There are several cash flow problems which may arise in a
business. I will identify those and suggest solutions to these issues.
A cash flow problem occurs when a business has low cash levels.
Therefore, it does not have enough cash to be able to pay its liabilities and
for example, struggles to pay its debts as they become due. The profit
which a business makes is the most important source of cash and if this is
affected, it will have a direct impact on cash flow problems. As a result, if
a business does not have healthy figures, such problems may arise.
Nevertheless, these issues can be dealt with easily, with the appropriate
strategy.
There are several other factors which may lead to cash flow problems in a
business. For instance, when a company offers too much credit to trade
debtors, this is a good way to build up revenue. However, it has to take
into consideration that if there is late payment by these customers, it can
put a strain on the business and can cause cash flow problems. As a
result, the company has to come up with strategies to regulate payments
by slow-paying customers. This can be achieved by negotiating terms;
issuing a specific date by which debtors should pay their remaining
balance. As a result, they will feel compelled to pay back the sum at the
given date and this would be in favour of the business, as everything will
run in an orderly manner. Another way out to this is to check the credit
score of debtors before supplying products or services on credit. This will
enable us to know whether they have the capability to pay it back.
Another factor which can lead to cash flow problems is when the business
is not able to pay creditors the amount due on time. This can have
consequences, as in the future, they may not be willing to provide
services to the businesses again. As a result, the business will have to
find another supplier, probably with lower interest rates, to ensure that
they repay the amount required. In such case, the business can have a
bank overdraft to help them pay for their debts.
Another increasingly important factor occurs when a business purchases
too many assets. Therefore capital expenditure should only occur if there
is the need and the business is able to afford this purchase. If there are
doubts concerning this, the business should make an arrangement with
the suppliers to ensure that paying for the assets will not consume too
much of the business’s profits. They could agree on reviewing and
rescheduling payments to avoid bad debts which can have an undesirable
effect and cause cash flow problems.
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