Cash Flow & Working Capital Management

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Questions and Answers

What is a common reason why businesses fail, related to their finances?

Running out of cash.

Why might investing too much in fixed assets hurt a new business?

It uses up limited funds.

What is a danger of allowing customers too much credit?

Businesses have to wait for money.

What can failure to control debtors lead to?

<p>Bad debts</p> Signup and view all the answers

How do seasonal factors impact cash flow in industries like agriculture?

<p>Trade fluctuates seasonally/Large cash inflow at harvest.</p> Signup and view all the answers

Flashcards

Over-investment in fixed assets

Spending heavily on equipment or vehicles early on, which drains available funds. Leasing might be a better option.

Excessive credit terms

Allowing customers too much time to pay, which delays cash inflow and may necessitate borrowing.

Failure to control debtors

Not managing debtors effectively can result in unpaid invoices and losses.

Overborrowing

Taking on too many loans, which increases interest costs and threatens both cash flow and overall financial control.

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Seasonal cash flow challenges

Fluctuations in sales due to seasonal changes, requiring careful planning to manage cash flow during low periods.

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Study Notes

Many businesses fail due to poor working capital and cash management.
Entrepreneurs sometimes prioritize profit over cash, which can lead to business failure.

Reasons for Cash Shortages

Investing heavily in fixed assets early on can deplete limited funds.
Leasing fixed assets may be a better option to preserve cash.
Offering customers long credit periods can tie up funds, potentially requiring the business to borrow to cover the gap.
Failure to manage debtors can result in bad debts.
Overborrowing to finance growth can increase interest costs.
Disneyland Paris required financial assistance from its parent company in 2014 to reduce its £1750 million debt due to high levels of debt.
Seasonal industries, like agriculture, experience fluctuating cash flows.
Rice farmers and fruit growers have large cash inflows after harvest but face expenses throughout the year with little to no income.
Careful cash management is essential in seasonal businesses.

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Description

Explore importance of cash flow and working capital. Learn reasons for cash shortages, like investing in fixed assets and long credit periods. Examine how seasonal industries require careful cash management to balance income and expenses.