Solving Cash Flow Problems
What a business can do when cash runs short: re-scheduling payments, an overdraft, cutting outflow, raising inflow or new finance, and how to weigh which solution fits best.
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Fixing a cash shortage
When a business is short of cash it cannot simply wait, so it acts. There are several solutions, each pulling in one of two directions: bringing more money in, or letting less money out. It can re-schedule payments, delaying what it pays or asking customers to pay sooner. It can arrange an overdraft, letting it spend beyond its bank balance for a fee. It can reduce its cash outflow by cutting costs, or increase its cash inflow by boosting sales and chasing money it is owed. It can also find a new source of finance, such as a loan or fresh investment. Every fix has a drawback, so the skill is choosing the one that suits the business and weighing what it costs. This module covers the solutions and how to judge them.
Solution words
Learn these before you match any fix, and remember every solution has a drawback to weigh.
Cutting outflow against raising inflow
Most cash flow fixes work in one of two directions, and a business often uses both.
How to choose a cash flow fix
Do not just list the options. Start from what is causing the shortage, then pick the fix that treats it and weigh what that fix costs. A short, one-off gap may only need an overdraft, but interest adds up. Slow-paying customers call for chasing debts rather than borrowing. Cutting costs helps, yet trimming too hard can damage the product. Name the solution that suits this firm, and be honest about its drawback rather than pretending it is free.
Match the solution to what it does
- an overdraft
- re-scheduling payments
- reducing cash outflow
- increasing cash inflow
- lets a firm spend beyond its balance for a fee
- delays what is paid or brings forward what is received
- cuts the money going out by trimming costs
- brings more money in by boosting sales
Which fix is this?
A firm arranges with its bank to keep spending for a short while even when its account drops below zero, paying interest for the privilege. Which solution is this?
- An overdraft.
- Reducing cash outflow.
- Increasing cash inflow.
- Increasing profit.
Ways to improve cash flow
Select the TWO actions that would improve a firm cash flow.
- Chase customers who owe money to pay sooner
- Cut unnecessary spending
- Pay every supplier far earlier than needed
- Ignore the shortage and hope
Monthly cash improvement
A firm cuts its monthly cash outflow by 800 pounds and raises its monthly cash inflow by 500 pounds. Add these to find the total monthly improvement to its cash flow, in pounds.
Order fixing the problem
Put the steps of solving a cash flow problem in order, earliest first.
- Spot the cash shortage in the forecast
- Find the main cause of the shortage
- Choose a suitable solution for the business
- Put it in place and monitor the cash
Complete the facts
An arrangement to spend beyond the bank balance for a fee is an _____. Delaying what a firm pays out is one form of re-scheduling _____. Cutting the money going out of a business reduces its cash _____. Boosting sales to bring more money in increases its cash _____.
Match the solution to its drawback
- using an overdraft
- delaying supplier payments
- cutting costs sharply
- taking a new loan
- interest has to be paid on it
- it can harm relations with suppliers
- it may lower the quality of the product
- it adds debt that must be repaid
Spot the true cash flow fix facts
Tap the TWO statements that are true about solving cash flow problems.
- Chasing money owed can improve cash inflow
- An overdraft charges interest as a drawback
- Paying suppliers earlier always improves cash flow
- Every solution is completely free of drawbacks
Fix the cash flow
Read each case and choose the best response, with a reason.
- A firm is short of cash mainly because customers pay their invoices very late. Which fix treats the actual cause?
- A firm needs a small amount of cash for just a few weeks to cover a one-off gap. Which fix suits best?
- A student lists five solutions but never says which suits the business or its drawback. How should the answer improve?
Recommend a cash flow solution
A small firm is profitable but keeps running short of cash because its customers pay late. Recommend how it should solve its cash flow problem.
- Explain briefly what a cash flow problem is
- Describe two possible solutions the firm could use
- Recommend the solution that best fits a firm whose customers pay late
- Weigh the drawback of your chosen solution
- Finish with a judgement on why it suits this firm better than the alternatives