Apart from heavy debts, another cause of Saab’s business failure is less investment. Investment is a kind of cash flow into a business, a firm can use the investment to run its business and also a firm with more investments flow into its business operation can solve its problem of lacking money. Statistics shows that Saab’s cash flow from investing activities were €-45 million in 2010, decreased from €-8 million in 2009. (Saab, 2010) In Saab’s case, little money from investment directly intensified its cash flow problems as its cash inflows decreased. With low cash inflows, Saab is unable to pay to suppliers for purchasing raw materials, and also Saab is not able to pay its employees on time. Therefore, workers would go on strike and suppliers might stop to supply to Saab, then the company suspend production. Meanwhile, Saab’s revenue may fall due to no more products selling in the market, thus Saab’s cash inflow might decrease. For instance, General Motors took over Saab in the 1990 and there has never been a year where it could manage profits. When General Motors realized itself is in trouble during the previous recession, it decided to let Saab go to survive on its own and stopped invest money into Saab. This tactics decreased cash inflows to Saab and worsened Saab’s financial situation, which could be the cause of Saab’s business failure. For this case, Saab can sell and leaseback its assets to raise money. This method would help Saab to release its capital and raise an immediate inflow of cash, by doing this the firm can improve its cash flow problems to avoid business failure in the short term. While, it is a cost in the long term because Saab needs to pay money to rent the assets after sold them. 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. Saab can delay purchasing things that are unnecessary during the current time period, and it might help Saab to decrease its cash outflows. For example, Saab can stop buying new company cars to save cash. In addition, it is important for Saab to keep its stock to a minimum, because the cost of raw materials is the main part of the company’s expenditure. To maintain a minimum stock will help Saab to avoid overproduction when the demand decrease in the market.
Moreover, changes in consumer demands result in a loss of sales to Saab, because Saab’s few car models cannot meet the majority of customer’s need for new and cheap car. Take Saab in China as an example, Saab sells Saab 9-3 and Saab 9-5 in China, and the prices of these two car models are quite expensive in terms of the average income level in China. Thus, Saab’s cars cannot meet the consumer demand in China and its sales was only 130 cars during the third quarter in 2011, which was below its break-even point, and its sales revenue was €75.8 million which did not cover its costs. The fact is that Saab made a loss in China, because it did not reach its minimum level of sales. To evaluate, with such a few number of money flow into the business, Saab is unable to expand its business. Therefore, the company might not be famous without outstanding achievements in overseas market. To some degree, a lesser-known market position would further cause Saab’s business failure. For this problem, Saab can decrease its pricing to attract more customers thereby its sales and revenue would increase. Saab can use this method to raise cash in the short run. However, the company might make loss in the long run since decreasing price would increase actual cost.
Look outside of cash flow problems, Saab’s small product portfolio can be regarded as a cause of its business failure. With few car models in such a fast-changing product life cycle industry, it is difficult for Saab to survive for long, because innovation and advanced technology are important for this type of industry. Thereby, the firm’s cars might be uncompetitive in the market. Comparing with Audi, Audi sells 23 types of vehicles in 2011, and its sales was 130 million cars which increased 19.2% from 2010, but Saab only sells 6 types of vehicles during 2011. (Wikipedia, 2012) Thus Saab’s market share would be plundered by its competitors which may lead to a loss of sales and Saab’s business may fail in the long term. The company can spend more money on new product development and advanced technology to produce new car models. Saab will be more competitive in the market with offering more choices to customers; also Saab’s sales would increase if its new cars are attractive to customers. However, spending on new product development may not be worthwhile if the company’s sales do not increase; therefore, managers and shareholders may feel diffident and this might cause business failure. Furthermore, it is difficult for Saab to be a cost effective company in the car industry, because its small economies of scale will also cause business failure. 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.
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References:
Marcousé I. Surridge M. and Gillespie A (2011) Business studies for A Level (4th edition. ). UK, Hodder Education.
SaabsUnited, 2012, More on Saab’s large debt and GM.
Saab Automobile AB, 2010, Annual Report.
Wikipedia, 2012, Audi.
Bibliography
Marcousé I. Surridge M. and Gillespie A. (2011) Business studies for A Level (4th edition) Hodder Education.
Gillespie A. (2011) Foundations of Economics (2nd edition). Oxford University Press.
DriveSpark. (2011) Saab Fails to Get Investment, Goes Bankrupt.
some problems such as losses of sales and increases in costs. Thus these causes would indirectly influence Saab’s cash flow and this fact also 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.