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The Cash Flow Problems of Saab.

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Introduction

?Cash flow is the flow of money into and out of a business in a given time period.? (Marcouse, 2011) In other words, it represents how a business is running in terms of cash inflows and cash outflows. Saab is a Swedish aerospace and defence company, established in 1937. Originally manufacturing aeroplanes, the company sought ways in which to diversify its business and in the late 1940s began manufacturing cars. For this kind of car manufacture, an efficient cash flow management is extremely important, because car manufacturing business requires huge samounts of money to buy raw materials for production and profit margin for this industry is quite low. However, Saab failed to manage its cash flow for many years. Particularly in the past few years, a lot of financial problems derived from cash flow problems, such as less investment, lower trade credit and the loss of sales. In December 2011, Saab declared bankruptcy due to the lack of funding. In the following paragraphs, causes of cash flow problem and some solutions for solving it will be discussed. Finally, a conclusion will be draw to summarize the importance of managing cash flow. Causes of cash flows problems can be discussed in several aspects. According to SaabsUnited.com, the company totally owed $ 1.39 billion (SaabsUnited, 2012), which brings heavy pressure to Saab?s cash flow management, because Saab has ...read more.

Middle

Also, selling a huge number of assets might influence the company?s normal operation which is a risk. Besides less investment, high expenditure is another cause of Saab?s cash flow problem. Saab?s annual report shows that its capitalized development expenditure was ?152.2 million in 2011, which was approximately two times much than that in 2010. Also, its costs of plant and machinery increased from ?148 million to ?168 million between 2010 and 2011. To analyze, Saab would suffer from increasing cash outflows since the company?s business is suffering from under-revenue, therefore high cash outflows would worsen its cash flow problems. Specifically, spending a lot of money on fixed assets would reduce the total amount of liquidity. Since liquidity reduced, Saab?s ability to pay debts and purchase raw materials will be weakened which might result its business failure. In order to reduce costs, Saab can lease equipment rather than buy it because the cost of leasing equipment is cheaper than buying it, this will help the company to reserve capital in the short term. Nevertheless, leasing will increase a lot of expenses if Saab leases the equipment for a long time. Therefore, leasing would increase cash outflows in the long term. Postponing expenditure could also be helpful to Saab in the short term. ...read more.

Conclusion

Saab?s low productivity and lacking of technology determined its small economies of scale which would increase its costs of production. Saab can increase its economies of scale by improving its productivity and developing its technology. Huge economies of scale would help save Saab to decrease costs and increase production and sales revenue in the long term. But it will cost a lot of money in the short term. Both these two causes discussed above can further influence Saab?s cash flow problems and result Saab?s business failure. To conclude, cash flow problem is the most common reason for Saab?s business failure, because it directly damages the company?s normal operation in terms of decreasing amount of cash. Thereby, it is important for Saab to solve its cash flow problems. Otherwise, Saab will probably go to bankrupt due to severe cash flow problems. However, there are other causes of Saab?s business failure, although these causes seems are not related to cash flow problems, but they might result in some problems such as losses of sales and increases in costs which indirectly influence Saab?s cash flow. Thereby, this fact illustrates that cash flow problem is the most common reason for a business failure. In a word, if a company wants to avoid business failure, it needs to pay more attention to manage its cash flow. ...read more.

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