In Layman’s terms the movement of cash around the business is called cash flow. This can be monitored and reflected in cash flow forecasts. However a more detailed explanation will divulge that a revenue or expense stream that changes a cash account over a given period. Cash inflows usually arise from one of three activities - financing, operations or investing - although this also occurs as a result of donations or gifts in the case of personal finance. Cash outflows result from expenses or investments. This holds true for both business and personal finance.
In business as in personal finance, cash flows are essential to solvency. They can be presented as a record of something that has happened in the past, such as the sale of a particular product, or forecasted into the future, representing what a business or a person expects to take in and to spend. Cash flow is crucial to an entity's survival. Having ample cash on hand will ensure that creditors, employees and others can be paid on time. If a business or person does not have enough cash to support its operations, it is said to be insolvent, and a likely candidate for bankruptcy should the insolvency continue. (Investopedia.com Online 2012)
D, Give your opinion on Bushra’s cash flow over this period highlighting any relevant Issues
The most noticeable issue on the cash flow is that from September to December onwards there is a decline in income of 25%. This decline is attributed to the seasonal nature of the business and could be overcome by offering discounted school services for the rest of year and branch out into Christmass shopping excursions and theatre trips for example. This could be one way to stop the cash flow stalling and make the company less orientated to the summer months. Another area which is to be highlighted is the rise in expenditure in the same time period. Where I feel that the increase in maintenance costs is inevitable, the possibility of renegotiating the insurance package should be looked into. The rise from £1000 to £1200 from October onwards could potentially be that their premium has increased but never the less should be investigated. As rent is a fixed cost it is not possible to change this but where wages is concerned it is considered to be a variable cost so can be changed. Where the wages expenditure remains the same at £120000 per month throughout the year it would be a logical step to hire some temporary staff. This would give the company the option to control its wage bill by only hiring staff when needed thus reducing the wage costs.
The company will need to implement various credit control measures to ensure the smooth and profitable running of the business. To achieve positive and dynamic results she should implement the following. Cary out appropriate credit checks on her suppliers to ensure prompt and correct payment. This is vital to maintain a constant and smooth cash flow. As well as credit checks the option to give a reduced price for prompt payment as will benefit Bushra as it will give an incentive to pay on time and will give a good indication of the financial stability of the business which she is trading with. This would also be beneficial if the company can quire this arrangement with their suppliers to reduce their own expenditure. The introduction of a maximum credit limit of £1000 per customer with a 30 day credit would help stabilise the cash flow where customers are involved. The Introduction of a credit control system to minimise the amount of time between work being carried out and payment collected. Prompt invoicing, a computerised sales ledger, and the employment of a credit control manager can only stabilise the cash flow for the future.
Task 2
A,
B, Comment on the effect of each change on Bushra’s cash flow.
The effect on Bushra’s cash flow is quite dramatic. Firstly the temporary replacement driver increases expenditure for the period by £10000 in total and the maintenance overhaul incurred and extra outlay of £3000. This Sharp decrease in net cash flow means expenditure has now risen by £13000 taking the closing balance for the end of December to -£11700 meaning she has lost £23400 since the start of July. This ultimately means that if the situation remains the same or worsens Bushra’s buses will no longer be able to continue as a viable business model.
C, Explain what action Bushra may have to take to cope with the situation.
There are a variety of actions that could be taken to enable the company to continue trading. A cash injection is needed to enable the balance to return to a positive. This could be acquired by a short term loan or a business overdraft to cover the major overhaul so the large outlay of £3000 could be spread over 6 months only adding £500 extra on her total expenditure. This would give her the option of regaining the balance into the black and to continue trading. However if trade worsens and she is unable to make payments on the loan or overdraft her situation will continue to worsen and she may have to dissolve the company. To use her own personal funds would be an option and she should use this situation to critically evaluate her budget for the future.
I feel the mistakes that were made where the employment of a new driver to cover the previous drivers illness period. The replacement driver was not needed as the income declines in the winter months so employing cover seemed an extra expenditure that worsened her situation. She should consider the reduction in wage expenditure by losing staff and employ a budget holder to ensure that expenditure does not exceed the amount allowed in the budget.
How can profitable business go bankrupt because of cash flow problems?
A profitable business can go bankrupt for many reasons mainly because you are not doing and adequate job of controlling your expenses. This can mean you are spending more than you have coming in.If the amount that you are spending is more than you are making you have a problem that needs to be addressed. You have to know that you have a problem so that you have time to solve the issue before it is too late. Another issue is the late or non-payment of customers this can ultimately halt cash flow and stall the business from progressing. Where in many instances payment is not received until months after the product or service is delivered a continuous smooth credit control system is essential.
Where Bushra’s cash flow has decreased from £11700 to minus £11700 over six months this is clearly due to the mismanagement of expenditure. The fact that the company spent unwisely shows that even a profitable business cannot continue to operate at this level. The failure to allow for an £3000 extra expenditure in maintenance in one month shows that the failure to control budgets is vital to a successful business. Budget planning is at the core of any profitable business.
In the case of Bushra’s rival companies failure allowing more opportunities to her business she could use this as a vital tool for her business survival. In regards to the firms approaching her being unknown the answer is simple. Solid credit checks involving references from the companies they have dealt with before to establish a credit history, also payment up front or part payment before services are committed is an option.
The company has been made aware that the finance manager has warned that the level of bad debt is rising. In certain cases prevention is better than cure and using the options mentioned above along with investigating the possibility of obtaining a personal guarantee from the directors of a client company could combat this for the future. However if necessary a letter of demand would be appropriate, and if this fails then a debt collection agency could be used. The implementation of debt factoring using an external debt recovery company is another option to help the recouping of monies lost. The final resort however would be legal action.
by
ptory1 (student)
