In this task I will be analyzing the cash flow problems a business might experience by giving examples and describing how and why they cause cash flow problems in a business.
The cash flow problems a business may experience can be:
- CUSTOMERS TAKE TOO LONG TO PAY
This is when a customer purchases an item without paying which leads the customer into a debt as it owes the company money. They then take too long to pay back the money which means that the company has sold a product and still haven’t received the payment for it which leads to a cash flow problem as their income reduced and expenditure increases. This is a cash flow problem because businesses go into loss as their inflow reduces and outflow increases. an example of this is when a business that does credit terms such as "Yes Car Credit" and "Banks" as they use credit cards. This allows people to purchase products without paying for them straight away.
- SALES ARE SEASONAL
This is when businesses decide to sell seasonal products such as sunglasses. These products are mostly purchased during a certain time of year as they are seasonal. For example if a business just sold winter wear such as coats, most of their sales would be during winter and autumn time however during the summer and spring season which can lead to a cash flow problem as their stock will not be getting sold which means that their sales will be decreasing. This causes a cash flow problem as their stock will not have enough sales all year round as there won’t be demand for their products during certain times of the year. This will result to businesses not being able to sell all their products all year round which will mean that they will go to waste which will mean that the businesses expenditure will be increasing where as in contrast their income will be decreasing which is the main cause of a cash flow problem. However they can overcome a business can overcome this problem by reducing the price of their products because like this the business will be earning something at least.
- SUPPLIERS AND OTHER BILLS PAID TOO QUICKLY
This is when a business pay their suppliers before they receive the goods. This then means that they are spending money on goods that are still not there which results to a high outflow and a low inflow. This is causes and leads to a cash flow problem because they might pay too much stock as they will pay in advance meaning that they will pay for the stock they approximate that will be used. However an approximate is not always right which can mean that they might be paying for stock that might be wasted later on meaning that the businesses money is gone to waste when it could have been used elsewhere and that would have helped the business. Paying bills too quickly is very similar to paying suppliers early. This is when a business pays for its bills such as lighting and heating in advance. This also causes a cash flow problem because it will mean that they might be giving money for lighting and heating which they might not use which will also mean that the businesses money is going to waste for no reason. Both these issues lead to a cash flow problem because the businesses expenditure exceeds its income.
- TOO MUCH IS SPENT ON EQUIPMENT
This is when a business spends more than they need to on their equipment which mean that they don’t have a lot of money left for other more important matters such as paying back bank loans or using it to pay off over heads. This leads to a cash flow problem because the business is wasting money on useless things which they don’t need or are spending more than they need to if they can find the same equipment at cheaper prices.
- MATERIALS COST TOO MUCH
This is when a business buys materials for its products and they cost too much. This has a negative effect on the business as it leaves the business with a little bit of money which then means that it does not have enough money left for its other...