3. Remember where cash comes from…and where it goes to Cash inflows Cash outflows Cash sales Payments to suppliers Receipts from trade debtors Wages and salaries Sale of fixed assets Payments for fixed assets Interest on bank balances Tax on profits Grants Interest on loans & overdrafts Loans from bank Dividends paid to shareholders Share capital invested Repayment of loans
4. Cash “flows” around a business Stocks ordered from supplier Production turns stocks into products Products sold to customers Customers pay for their purchases Stocks held until a customer is found Outflow - cash paid to suppliers & employees Inflow – cash paid by customers
5. What is cash flow problem? When a business does not have enough cash to be able to pay its liabilities
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12. Overtrading (2) Cause Business expands its order book at a faster rate than access to working capital will sustain Symptoms Higher amounts owed by customers Cash running out Having to delay payments to suppliers Actions Reduce business activity – slow growth down Introduce new share capital to ease the strain Improve the management of working capital – e.g. reduce stocks
19. Improving working capital Debtors Amounts owed by customers Creditors Amounts owed to suppliers Stocks Cash tied up in stocks
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29. Bank overdraft v Bank loan Bank Overdraft Bank Loan Advantages Relatively easy to arrange Greater certainty of funding, provided terms of loan complied with Flexible – use as cash flow requires Lower interest rate than a bank overdraft Interest – only paid on the amount borrowed under the facility Appropriate method of financing fixed assets Not secured on assets of business Disadvantages Can be withdrawn at short notice Requires security (collateral) Interest charge varies with changes in interest rate Interest paid on full amount outstanding Higher interest rate than a bank loan Harder to arrange
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