The Cash Flow Problems of Saab.

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“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  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 to pay the debts thereby it does not have enough money to run the business, and this could be the cause of Saab’s bankruptcy. Additionally, Saab’s current ratio is 1.3 which is lower than the ‘ideal’ current ratio; this means that Saab now is not able to pay its debts, and it also illustrated that cash flow problem is a major cause of Saab’s business failure as pay heavy debts would increase Saab’s cash outflows. To solve this problem, Saab can increase its cash inflows by borrowing a loan and overdraft from the bank, thus Saab would be able to pay its debts. With more money flow into the business, Saab would solve its cash flow problems resulting from the lack of cash. But, to some extent, the high interest rate of a loan would make it become more difficult for Saab to repay the loan in the long term. Different from a loan, an overdraft is a few number of money that Saab can use; thereby if Saab cannot solve its cash flow problem with such little money, the debts will become heavily. However, the interest rate of an overdraft is lower than that of a loan, thus borrowing an overdraft might be more effective in the short term.

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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 ...

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