Finance: Dealing with a Cash Flow Problem (GCSE)

The best way to improve cash flow is to have a reliable and up-to-date cash flow forecast. This provides the information which highlights the main cash flow issues.

In terms of actions which management can take, here are the main options:

Cut costs – by far the most important method of improving cash flow. Every business can identify savings in non-essential costs if it looks hard enough. The recent credit crunch and recession has proved that businesses can take drastic actions to cut overheads and other costs, which immediately reduces cash outflows.

Cut stocks: reduce the amount of cash tied up by buying and holding raw materials or goods for resale. This can be done by (a) ordering less stock from suppliers and/or (b) offering discounts on stocks held to encourage customers to buy (ideally for cash).

Delay payments to suppliers – a dangerous game, but widely used in business. By taking longer to pay bills owed, a business can reduce cash outflows (at the risk of damaging relationships with suppliers though).

Reduce the credit period offered to customers – this is easier said than done. By asking customers to pay for their purchases quicker, a business can accelerate cash inflows. However, there is no guarantee that customers will agree. They may need to be given a financial incentive, such as a prompt-payment discount.

Cut back or delay expansion plans – many of the biggest cash outflows occur when a business is expanding (e.g. opening new offices or shops, adding a production line or factory). By delaying this expansion, cash can be conserved in the short-term.