IGCSEBusinessCIERevision Notes5. Financial Management5.2 Cash-flow Forecasts & Working CapitalSolving Short-term Cash-flow Problems

Solving Short-term Cash-flow Problems (CIE IGCSE Business)

Revision Note

Danielle Maguire

Expertise

Business Content Creator

Overcoming Short-term Cash-flow Problems

  • Liquidity is the ability of a business to meet its short-term commitments (e.g. payments to creditors) with its available assets
    • A business that cannot pay its bills will usually fail very quickly, even if they are profitable
    • Managing liquidity is a key way to manage risk in a business and helps a business prepare for the unexpected

  • Many businesses experience short-term cash-flow problems 
    • Start-ups initially have high costs and low sales revenue
    • Existing firms may unexpectedly receive a large order that requires them to buy and pay for a large amount of raw materials
       
  • There are several ways in which a short-term cash-flow problem can be resolved

Diagram: Solving Short-term Cash-flow Problems

ways-to-overcome-short-term-cash-flow-problems-cie-igcse-business-rn

Asking a supplier to increase the amount of trade credit they offer is one popular solution to ensure raw materials keep flowing into the business

  • A business often uses more than one method to ensure cash-flow remains positive, e.g. combining an overdraft and reducing the time period available for their customers to pay them

The Methods used to Overcome Short-term Cash-flow Problems


Method
Explanation

Seek to increase the trade credit period

  • The business may approach some of its most trusted suppliers and ask them for more generous repayment terms
    • E.g. They may request their suppliers to extend the repayment period from 30 days to 90 days

Shorten debtor repayment periods

  • If the business offers customers the ability to 'buy now, pay later', this delays the cash inflow. Removing the option to pay later will improve cash-flow
    • However, the business may lose some customers to competitors who are able to keep offering credit terms

Apply for a bank loan

  • Businesses can often arrange short-term bank loans in a very short time frame, ofetn a couple of days
    • Interest will have to be paid

Delay plans to purchase new equipment 

  • Postponing the purchase of new equipment, such as vehicles, may significantly reduce cash outflows

Only sell in cash, not credit 

  • Businesses can choose to only accept cash as payment, meaning it receives money immediately
    • Customers may buy from competitors that sell on credit instead

Overdraft facility

  • Temporary cash-flow problems can be solved by arranging to spend more than the businesses current account balance
    • Interest rates may be relatively high, increasing business costs

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    Danielle Maguire

    Author: Danielle Maguire

    Danielle is an experienced Business and Economics teacher who has taught GCSE, A-Level, BTEC and IB for 15 years. Danielle's career has taken her from across various parts of the UK including Liverpool and Yorkshire, along with teaching at a renowned international school in Dubai for 3 years. Danielle loves to engage students with real life examples and creative resources which allow students to put topics in a context they understand.