Possible Solutions to Solve Cash Flow Problems

Topics: Debt, Money, Time Pages: 4 (1661 words) Published: January 7, 2011
Cash flow is the movement of money in and out of a business. It is of vital importance for a company continually monitoring and controling its cash flow. A shortage of cash may lead to insolvency while an excess of cash is wasteful because it is not a productive asset. Therefore, various sources of finance should be combined to help maintain a sound record of cash flow. However, ‘The problem is not just to find the money but to find it from the right sources at the right price and at the right time.’ (Woodcock. C 1982, p120) That means the theory of business finance may be discribed as being based upon an efficient choice between those sources and uses of funds which are avaiable to the firm. This essay will first identify the possible causes for an expanding firm that faces the cash flow crisis and then propose feasible solusions to solve it. There are perhaps three main elements in controlling cash flow: debtors, stock and credit. It is possible to achieve rapid improvements in cash flow by ensuing that debtors pay more promptly, that stocks are cut to the minimum required to provide an efficient service, and that full benefits of the credit terms offered by suppliers is taken. Alternatively, failure in achieving these will be the reason that results in the company’s struggling in the cash flow. Firstly, the cash flow crisis may be caused by an increase in the level of bad debts that come with the growth of credit sale in conjunction with the failure in reviewing the avergae age of debtors and unproportionate distribution of credit by customers. An expansion may be brought about by increasing customer credit limits and extending the period of credit. Though debtors are one of a firm’s most liquid assets, the expected revenue is only transformed into cash receipts when customers pay. Therefore, the promptness of payment is important because credit requires financing and is costly, while lengthening delays in payment are a sign of bad debts and an incresing...
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