Improving Cash FlowAS Business Studies

Aims & ObjectivesAim:• Understand ways of improving cash flowObjectives:• Identify causes of cash flow problems• Analyse methods of improving cash flow• Evaluate methods of improving cash flow

StarterWomen's clothing retailer Ellie Louise has gone into administration. Administrators from restructuring firm Zolfo Cooper said Ellie Louise had suffered "cash flow problems arising from the current challenging fashion retail environment". Ellie Louise has 97 stores throughout the UK, and employs 439 staff. It was founded in 1980 and is based in Leeds. Zolfo Cooper said Ellie Louise's finances woes were "exacerbated" by its 2010 purchase of the Trade Secret brand. Graham Wild, Partner at Zolfo Cooper said: "Unfortunately, as with many other fashion retailers exposed to declining consumer spend, challenging trading conditions have led to increased financial pressure on this well-known brand.

1. What is a cash flow problem?

2. What were Ellie Louise’s cash flow problems caused by?

Causes of Cash Flow Problems

In groups brainstorm factors you feel may cause cash flow problems.

Causes of Cash Flow Problems

Lack of Planning• Use of cash flow forecasting• A lack of planning makes problems more likely

Poor Credit Control • If credit control is badly managed then debtors will not be

chased up for payment and bad debts (never be paid) will not be identified

Allowing Customers Too Long to Pay Debts• May reduce short-term cash inflows leading to long term

difficulties

Causes of Cash Flow Problems

Overtrading• When a business expands rapidly and has to pay for

expansion months before it receives cash from additional sales.

Unexpected Events• A new delivery van needed, competitors lower prices, a

dip in sales – could all negatively affect cash flow.

Ways of Improving Cash Flow

Reduce Cash Outflows

Increase Cash Inflows

BE CAREFUL: IMPRVOING CASH FLOW IS NOT THE SAME AS IMPROVING SALES PROFIT. EG. INCREASING ADVERTISING WILL INCREASE SALES IN THE LONG RUN BUT

IN THE SHORT RUN WILL WORSEN CASH FLOW!

Increasing Cash Flow Methods

The Increasing Cash Flow Methods Game of Intelligence, Fun, Excitement and Physical

Exercise Spectacular

H C I MD SO ACu As Lo L

Complete

H• High rates of interest may be attached.

• Overdraft

C• Can be withdrawn by the bank which often causes

insolvency.• Overdraft

I• Interest Repayments• Short Term Loan

M• Must be repaid by the due date.• Short Term Loan

S• Selling quickly can result in a low price• Sale of Assets

A• Might be required at a later date for expansion, and

could be used as collateral for future loans.• Sale of Assets

L• These costs add to overheads.• Sale and Leaseback

Lo• Loss of potential profit if asset prices increase• Sale and leaseback

As• Could have been used as collateral for future loans.• Sale and Leaseback

Cu• Customers may purchase from rivals who offer better

terms.• Reduce Credit terms to customers.

O• Only abut 90-95% will be paid by the debt factoring

company• Debt Factoring

D• The customer does not pay the business, does this

suggest the company is in trouble?• Debt Factoring

Methods of Reducing Cash Outflows

• For each of the following in your groups decide on which method is being described.

• Display on your white boards after the count of 10.

Methods of Reducing Cash Outflows

• May reduce any discount offered with future purchases.

• Delay payments to suppliers

Methods of Reducing Cash Outflows

• Expansion become very difficult.

• Delay spending on capital equipment.

Methods of Reducing Cash Outflows

• Future demand may be reduced by filing to promote the products effectively.

• Cut overhead spending that does not directly affect output.

Methods of Reducing Cash Outflows

• The asset is not owned by the bussines.

• Use leasing.

Methods of Reducing Cash Outflows

• They may insist on cash on delivery or refuse to supply at all.

• Delay payments to suppliers.

Methods of Reducing Cash Outflows

• Efficiency of the business may fall if outdated equipment is not replaced.

• Delay spending on capital equipment.

Exam Question• January 2011 Question 2c.

• Discuss whether increasing its overdraft limit is the best way for Velocity Ltd to improve its cash flow position. (13 Marks)