📈 Increasing Cash Inflows
The first approach to improving cash flow is to get more money coming in and get it coming in faster.
- Reduce credit terms — ask customers to pay in 14 days instead of 30
- Offer early payment discounts — e.g. 2% off if paid within 7 days
- Chase overdue debts — actively pursue customers who haven't paid
- Use factoring — sell unpaid invoices to a factor for immediate (but reduced) cash
- Increase sales — through marketing, promotions or entering new markets
Getting money in faster doesn't always mean earning MORE — it means getting what you're already owed sooner! ⏰
📉 Reducing Cash Outflows
The second approach is to reduce or delay the money going out.
- Negotiate longer credit terms with suppliers — pay in 60 days instead of 30
- Reduce stock levels — order less and more frequently (JIT approach)
- Cut unnecessary costs — cancel unused subscriptions, reduce waste
- Lease rather than buy — preserves cash for other uses
- Delay non-essential spending — postpone office renovations or equipment upgrades
Be careful: cutting costs too aggressively can harm the business — reducing marketing may save cash now but lose customers later! ⚠️
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💰 Obtaining Additional Finance
Sometimes improving timing isn't enough — the business needs an injection of extra cash.
- Bank overdraft — flexible, short-term borrowing for temporary gaps
- Short-term loan — to cover a specific cash shortfall
- Sale of assets — sell equipment or property the business no longer needs
- Owner's capital injection — the owner puts in personal money
- Sale and leaseback — sell an asset and lease it back to free up cash
Example: A business owns its warehouse. Through sale and leaseback, it sells the warehouse for $500,000 (improving cash flow) and pays $3,000/month rent to continue using it.
🎯 Matching Strategies to Problems
The best strategy depends on the cause of the cash flow problem.
- Customers paying late → tighten credit control, factoring
- Seasonal dip in sales → overdraft, build up reserves in peak months
- Overtrading → slow down growth, arrange longer-term finance
- High stock levels → sale/clearance, switch to JIT
- Large capital purchase → leasing, loan, sale and leaseback
- General overspending → cost-cutting review, budget setting
In the exam, always LINK the strategy to the specific problem — don't just list generic solutions. Show the examiner you understand WHY that strategy works! 🎯
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⚖️ Evaluating Cash Flow Strategies
Every strategy has trade-offs — what helps cash flow now might cause problems later.
- Factoring gives immediate cash but at a cost (factor keeps a percentage)
- Overdrafts are flexible but expensive (high interest rates)
- Selling assets raises cash but reduces the business's capacity
- Cutting stock may improve cash flow but risks stockouts and lost sales
- Delaying supplier payments may damage relationships and lose discounts
The BEST answer in the exam evaluates BOTH the short-term cash flow benefit AND the potential long-term consequences of the strategy 📊