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The Challenges of Cash Flow - Assignment Example

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Cash flow management is a major problem affecting small businesses. Some of the reasons for this problem are highlighted bellow.
Cash flow problems affect most business and entrepreneurs tend to…
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The Challenges of Cash Flow
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The Challenges of Cash Flow al affiliation Question The success of any business depends on the effectivemanagement of cash flow. Cash flow management is a major problem affecting small businesses. Some of the reasons for this problem are highlighted bellow.
1. Declining sales have a negative effect on profitability thus reducing cash inflow. A decline in gross margin of profit also reduces profits.
2. Unprofitable business leads to the accumulation of losses to a point where one cannot pay for purchases thereby leading to borrowing (Linzer, 2006).
3. Some other factors also include capital expenditure, Excessive Debt and Excessive Personal Drawing.
4. Poor management of working capital like carrying an moving stock, excessive levels of stock and obsolete stock. Poor credit management like poor credit approval that results in bad debt.
Indicators of cash problem in a firm include;
1. Late payment of bills payable when they are due, or complete failure to pay the bills when due.
2. Extreme evidence of financial problems including legal action by supplies or tax offence.
In the event of any indication of such problems in your business, it is advisable to take immediate action to correct your cash flow.
Question 2
How to Improve Cash Flow
Cash flow problems affect most business and entrepreneurs tend to think that growth in their business activities is a solution to this problem. However, they realize after archiving their growth objective that they end up having a more complex cash flow problem. Some useful tips to help manage cash flaw are explained bellow (Jones, 2008).
Collecting accounts receivables – In order to facilitate the receipt of receivables, the firms mailing system should be serviced by the bank. This will enable customers to mail payments and checks processed by the bank as quickly as possible. Companies should use one bank to centralize and easily manage their cash.
Tightening credit requirements – It is a marketing strategy to extend credit to customers to increase sales. Businesses often have to extend credit to customers, particularly when starting out or growing. Businesses should also scrutinize individual customers to assess the risks related to selling to customers on credit. Additionally, companies should accept credit cards although it will attract a small percentage of interest (Linzer, 2006).
Increasing sales – increased sales would defiantly increase cash inflow. In order to achieve this objective, a company should sell more goods to existing customers and get new customers through advertisement of products and services (Jones, 2008).
Pricing discounts – discounts on accounts receivable motivate customers to pay early in order to claim the discount offered. This will definitely improve cash inflow. However, this will reduce the firm’s profit margin. A company may delay payments to the suppliers as a counteraction. This must be done with a lot of precaution so as not to affect the firm’s credit rating.
Securing loans – bank overdraft or other short-term loans can also be used to solve short-term cash flow problems (Linzer, 2006). A long-term amortized loan is also another way to solve cash flow during financial difficulties but it should sum up principal and interest until the loan is finally settled.
Set cash flow targets- proper cash flow projections will enable your firm to properly estimate and project the required cash flow. The use of cash flow analysis tools like use of cash budget and projected cash flow statement are also effective (Jones, 2008).
Make payments easy for customers.
Make payment by your customers as easy as possible. Try to avoid cheque payment since it delays the time span by which money is paid into your account. Firms should also incorporate online payments (Linzer, 2006).
References
Jones, V. R. (2008). The executive guide to boosting cash flow and shareholder value: The profit pool approach. Hoboken, N.J: Wiley.
Linzer, R. (2006). The Cash Flow Solution: The Nonprofit Board Members Guide to Financial Success. Hoboken: John Wiley & Sons. Read More
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