Justify recommendations on ways in which problems with cash ow, working capital, costs and budgets and breakeven may be addressed.

Authors Avatar by ellouise1997hotmailcom (student)

I am the assistant financial manager of PWC and I have been asked by my manager to write a report for one of our profitable clients Nike. I will evaluate and justify recommendations on ways in which problems with cash flow, working capital, costs, budgets and break-even may be addressed for them.

The first thing they need to consider is cash flow. Cash flow is the movement of cash going in and out Nike over a period of time. Nike may encounter a problem with having low profits or losses which can effect cash flow. I recommend that Nike increase their selling price of their products. If their prices increase their sales revenue will increase leading to an increase in profits. However, Nike must be aware, if they increase their prices to high, it could lead to a lower demand in their products, which will lead them back into losses. Furthermore, I suggest that Nike reduce their costs. They can do this by finding cheaper supplies or making some staff redundant. If Nike can reduce their costs it will mean that not as much money needs to be paid out which will improve cash flow. Furthermore, allowing customers too much credit will cause cash flow problems because they won’t be gaining the cash they need. Therefore, I suggest having a cash only policy. This would be good as they would always gain their cash for their products, and wouldn’t have to worry about people not paying them. However, this may lead customers going elsewhere. Alternatively, they could use a credit factoring service with their debtors. This would mean they will gain cash, improving cash flow. Or another way to resolve cash flow would be to chase up bad debts. Nike could have a solicitor threaten legal action. This will persuade Nike’s debtors to pay their debts and Nike will gain the cash that’s owed.

Furthermore, Over-investment in capacity can lead to cash flow problems; this happens when a business spends too much on fixed assets such as machinery and premises; these assets are very expensive. Therefore, I suggest that Nike lease fixed assets. This would be a cheaper alternative and if it breaks down the leasing company is responsible. However, if Nike already own many fixed assets, they could sell the assets that are unused; this will help them gain cash preventing less cash flow problems. Additionally, holding too much stock will lead to cash flow problems; this will be tied up as only when they sell their stock will they be able to gain the cash for it. Therefore, I suggest that Nike estimate a reasonable amount of stock they will sell; they can do this by looking at their previous sales to determine their production levels. From this they will see how much they sold and base that information on the amount of stock they buy to ensure they sell all of it. Moreover, over trading can lead to cash flow problems. Over trading happens when they open up stores to quickly which costs lots of money. I suggest that Nike do market research to ensure that any store they open will be profitable. From this Nike will know if there is a demand for their store and they can decide if they want to open a new store. This will help with cash flow problems because they won’t be using money on unnecessary things that won’t provide a profit. In addition, unexpected changes will lead to cash flow problems. For instance, a machine may break down. Therefore, I recommend that Nike lease their machinery. This is because if it breaks down it will mean that the leasing company is responsible not Nike. So, Nike wouldn’t need to pay to repair or replace the machine which can improve cash flow. Lastly, seasonal demand can lead Nike to cash flow problems. Therefore, I recommend Nike to have promotions. For instance, they can sell their summer stock in winter with promotions. Promotions could include buy one get one free or half price off. This will help with cash flow problems as they can get rid of stock that may be hard to get rid of initially.
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Working capital can become a problem if it becomes insufficient. Working capital is the cash available to a business that allow them to operate on a day-to-day basis. Insufficient working capital means that Nike will be unable to take advantage of new opportunities or adapt to changes. It also means that trade and cash discounts are lost and Nike will be unable to offer a credit line. As well it means financial reputation is lost due to not paying and creditors may apply for court action. If Nike face these problems, I suggest to employ a good collection ...

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