Question

Many companies experience cash flow problems at some point and time. Discuss any eight steps that firms can employ to address cash flow problems?

Answer 1

Cash flow problems are very general which is experienced by many companies at certain stages. However some companies manages to do well to hold optimum cash for the time of need. Some of the general steps taken by firms to avoid cash flow problems are as following:

1. Avoid using short term loans in the long term investment in the hope of any future revenue which is seeming to come at a certain probability. This can sometimes results in blunder. So in order to save perfect cash flow to pay the short term loans, avoid investing in a long term asset, rather this should be invested wisely so that it can be paid on time.

2. Negotiate with the suppliers to make a change in their agreements to provide extra time for paying the bills due. This can be possible by building up perfect relations with the suppliers which will help the business to grow and hold an optimum level of cash also.

3. The firms can pay incentives to their clients in order to get payments faster. This will keep the cash flow up which can be utilized as and when required.

4. Another way could be reducing the operating cost which is always a great method to keep the cash flow up. This can be one way solution to two problems i.e. if successful the firm will enjoy the cash flow as well as increased profits.

5. Do not invest too much in inventory. Excess inventory can cause cash flow problems. So it is wiser for a business to invest in inventory that much which is essentially required to the business depending on the demand of the product.

6. It is always preferable to get loan for the inventory to be purchased in case of a seasonal demand and its repayment should be long lasted till the time the seasonal payments are expected to be received.

7. The well known method of factoring is used widely to get the payments faster from the clients. This can be implemented by the businesses facing cash flow problems or in order to avoid any type of cash flow problem in future. As factoring helps in getting the payments in advance, from debts which are stubborn enough to pay it, with a small amount of discount.

8. Debts should be taken wisely as per the need and proper analysis of future conditions and growth of the business. So that they can be paid on time.