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Sources of Cash Flow Problems

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Introduction

´╗┐Sources of Cash Flow Problems Overtrading Young and fast growing companies are particularly prone to over-trading. Over-trading occurs when a business is attempting to fund a large volume of production with inadequate working capital. Investing too much in fixed assets In the initial stages of a business funds are limited, spending large amounts on equipment, vehicles and other capital items drains resources, it may be better to lease some fixed assets and leave some cash funds. Stockpiling Holding stocks of raw materials and finished goods is expensive. ...read more.

Middle

One of the dangers of this is that firms allow their customers too long for payment. This means that a firm may be waiting for payment and may be forced to borrow for this period. Failure to control debtors may lead to bad debts. Taking too much credit Taking more credit may appear to help a firm?s cash position as cash payments are delayed. However some drawbacks include higher prices, lost discounts and creating a bad name in the trade. Over borrowing Businesses may borrow to finance growth. ...read more.

Conclusion

Unforeseen expenditure Businesses are subject to unpredictable external forces. They must make a financial provision for unforeseen expenditure (e.g. equipment breakdown, strikes, bad debts etc) Unexpected changes in demand There are times when demand for a product unexpectedly falls. Fashion changes could lead to a fall in demand which in turn leads to a lack of cash flowing into the business Seasonal factors Sometimes trade fluctuates for seasonal reasons. In farming cereal farmers have a large inflow when their harvest is sold, for most of the year they have to pay expenses without any cash flowing in. This situation requires careful management indeed, although it is possible to predict these changes. Sources of cash flow problems ...read more.

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