Solutions to cash flow proble

If a business has predicted cash flow problems in advance, then there are a number of possible solutions. These are outlined below:

• Overdraft arrangements – a business with a fluctuating cash flow cycle should be able to show the forecast to the bank and make arrangements for periods of negative cash flows. Banks sometimes offer free overdraft facilities to help businesses through these periods, but only if pre-agreed. Going overdrawn on a bank account without an agreement with the bank can be a very expensive option. 

• Negotiating terms with creditors – creditors are people or businesses that a business owes money to, normally because goods or services have been bought on credit as opposed to cash purchases. A business with cash flow problems could try to negotiate a longer payment term with its suppliers – for example, an increase from 30 days to 60 days. This would slow down the flow of cash out of the business. A negative effect of this, however, may be the loss of any discounts offered for prompt or early payment. 

• Reviewing and rescheduling capital expenditure – having identified cash flow problems, the owner or manager could review what cash outflows were being spent on. Such a review might identify areas of expenditure that could be cut or postponed. It is difficult to do this if the expenditure is on revenue items – for example, replacement stock – but more achievable if it is capital expenditure. A business could, for example, postpone plans to replace machinery or buy a new van. 

An alternative action here could be to consider leasing an item of capital equipment rather than buying it outright. This can prove expensive in the long run, but means that rather than paying one lump sum, the business can pay to use it on a monthly basis. 

Activity: E.1.5:

Using the hyperlinked - cash flow forecast - identify solution which would advoid severe potential cash flow shortfalls.