UNIT 2: IMPROVING CASH FLOW

UNIT 2: IMPROVING CASH FLOW

1. CASH FLOW refers to the movement of money into and out of the business. This includes receipts, cheques, debit cards and payments by cash.

   • The main causes of cash flow are allowing too much credit, poor credit control, holding excessive stock, lack of budgeting and overtrading
   • You can improve cash flow by regularly monitoring through budgets, secure an overdraft, take out a short term loan and extend credit with suppliers.

2. DEBTORS are individuals or other businesses who owe the business money for goods and services received

3. CREDITORS are individuals or other businesses to whom the business owes money

4. OVERDRAFTS are arrangements between a business or individual and their band where they can withdraw more money from their account than actually deposited.

   • Advantages are that they are simple, quick to arrange, flexible and cheap in the short term.
   • Disadvantages are that they can be expensive if they are used regularly and they are repayable on demand

5. FACTORING involves selling a businesses debts to a third party who usually provide around 80% - 85% of the value of payments

   • Advantages include immediate cash benefit, enable discounts, lower administration costs and reduced uncertainty
   • Disadvantages include reduced revenue, reduced profit margins and negative customer perception

6. SALE AND LEASEBACK involves firms selling off fixed assets such as land, buildings and machinery that they own and then leasing them back

   • Advantages include that cash is quickly generated, greater flexibility, scope for updating and offset against tax
   • Disadvantages include the business become committed to meeting regular payments and reduces the collateral available to secure loans