Cash Flow Problems and Solutions
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Sharma and Ryan are planning to share ownership of the business SIGNature Ltd. The business will manufacture plastic road signs for builders, tourist attractions and local councils. It is imperative that the business are continually monitoring and controlling their cash flow if they aim to survive, specifically making sure there are sufficient funds to cover immediate spending. However, SIGNature Ltd. should avoid holding too much cash as this is an unproductive asset, as the business could lose out on the possible profit from investing in the cash. Many businesses produce regular cash flow forecasts, listing all likley receipts (cash inflows) and payments (cash outflows) over a future time period, in this case 12 months. SIGNature Ltd. decided to invest £12,500 each of their own money into the business totalling at £25000 altogether, an adequate amount of money to start off the year, however; looking at their closing balance of £5,556 this investment could have been much higher, the business were aware of their costs for this month of £135,443 – a considerable sum of money to be coming out of a start-up business in the first month.
The main issue with these high outgoings is the slightly low opening balance for February, which could have been avoided if precautions had been taken such as investing more money into the business or perhaps spreading the costs. In addition to the capital introduced Sharma and Ryan were granted a bank loan of £80,000, a fairly large sum which aided the funding of machinery at £85,000, fittings and fixtures at £20,000 and insurance at £1,000 totalling at £106,000. With the uncertainty of sales these large payments in the first month may have negative results for the months to come if their sales do not meet targets, possibly landing the business into debts that will have to be repaid through external sources of finance, which will in turn incur additional borrowing costs adding pressure to the situation. Their available bank overdraft of £20,000 could be considered, however, this would mean additional debt and additional creditors to repay, the business would then need to find ways of raising money themselves using the money borrowed, in order to repay all debts successfully – this would be unlikely to work as it would take time, resources and money putting extreme pressure on the business. Many business over borrow to finance growth, increasing interest costs which not only threatens the businesses cash position but the overall control of the business. It is important for Sharma and Ryan to fund growth in a balanced way; additional funds could have been invested through savings, Sharma and Ryan could have looked into accessible external sources of finance by for example seeking financial support from family and friends who would be interested in making an investment into the business. It appears that the business invested too much on fixed assets in the first month as the initial stages of a business’ funds are limited.
Spending large amounts of money on equipment, machinery and other capital items can drain resources; Sharma and Ryan should consider lease some of these fixed assets such as the machinery, leaving sufficient cash funds. Receipts are lowest in February than any other at £41,556, a possible result of the lower opening balance from the previous month’s outgoings. Sales remained the same at £30,000, while regular costs remained the same, including salary payments of £6,333 in total; this may have potential effects on the business and its profit, by paying the same outflows while receiving low inflows can cause the business to eat into turnover and therefore their profits. Other payments could also be investigated, such as their courier for example, their payments of £1,500 seem extortionate, reducing the working capital the business have available to spend on daily activity and pay expenses. This may be an example of poor financial management, an inexperience in managing cash or a poor understanding of the way cash flows in and out of their business may lead Sharma and Ryan into problems. For example if a business were to spend heavily just before it receives cash from their customers who have bought on credit it is likely to face problems. It is not wise to spend cash when it is not definitely there. It will help SIGNature Ltd. to save cash if they were able to delay paying their courier for services they have already bought, the courier may also be able to extend their credit period (if any) from 30 to 60 days for example. However the business should be careful that the courier do not withdraw their credit facilities and refuse to transport the business’ goods if they are waiting too long for payment.
Alternatively Sharma and Ryan could look into other courier services, comparing prices on the market in order to find a company that will transport their goods at a lower cost; leaving additional cash funds to support other business activity. Additional action that could be taken includes reducing the personal drawings from the business, owners who regularly take cash from the business could attempt to take less. Living expenses may be an issue to consider, however, making a reduction in drawings taken could reduce the amount of money that leaves the business. March sales are again £30,000, with the addition of £10,700 incurred in quarterly costs including payments to HMRC and telephone bills while advertising payments have risen by £500; the result of these costs mean the closing balance drops to £7,970 from 12,113 in the previous month, possibly impacting on April’s cash flow if sales do not rise as expected. In addition to this Ryan and Sharma are continuing to pay themselves as well as their two staff, raising costs by £3,166 which could be spent on other aspects of the business while continuing to pay the same rates for all other costs; consequently their outgoings for the month total at £40,143, a higher than optimum total.
Businesses are subject to unpredictable external forces, meaning they must make financial provision for any unforeseen expenditure. Equipment breakdowns, tax demands, strikes and bad debts are common examples of emergency expense. In the early stages of business development it is more likely that business owners are affected by unforeseen expenditure due to lack of experience or insufficient planning. For Sharma and Ryan, it is very important they take these factors into account when financing their business, their current poor financial management could lead them to additional expenses they are not able to afford and could possibly have long-term effects on the business which will be hard to recover from. In order to raise funds SIGNature Ltd. may consider stimulating sales for cash, many business can generate cash by offering large discounts for customers who will pay in cash, reducing the amount of time waited to receive cash from sales to cover any emergency costs incurred. Sharma and Ryan could simply delay payments, keeping this cash within the business for a longer period of time and only paying when put under pressure by creditors. Although this may be acceptable in many cases, the business should be cautious to make HMRC payments upfront to avoid future issues such as the loss of assets or additional costs as a result. Sometimes it may be possible to sell stock of raw materials, components or unfinished goods for cash. To generate cash quickly at lower cost if necessary, however, stocks such as road signs and their materials are specialised so may prove difficult to sell. They may consider selling to collectors of plastic, although this may not generate enough to benefit the business. April and May’s sales are to rise to £37,000 as do purchases, going from £13,500 to £16,650 which could impact on profits after costs are deducted, spending although sometimes necessary can have negative effects on the business inflows. While costs consist of mostly mandatory payments, heat and lighting remain at £500; the approaching summer months and likely hot weather suggest that this month’s bill should be considerably lower as days become longer at beginning of spring meaning more heat and light will be naturally generated, spending cash on these bills when they are not required is an example of financial mismanagement possibly leading to additional finance issues due to lack of cash. The business should focus on making only essential purchases, postponing or cancelling nay unnecessary spending and only buying resources when required.
The business should consider ways to utilise natural light effectively in order to save energy, and costs as a result; an example could be the installation of solar panels, in addition to this the temperature in this month should be higher and therefore no need for the business to be paying the amount they are for heating. Other ways to gain or regain cash involve putting pressure on customers to pay back what they owe more quickly. Allowing customers to receive trade credit can benefit as they will appreciate the extra time to pay for purchased goods, however as SIGNature’s customers are often other business they may take advantage of this act of goodwill in resistance to repay the business when asked. Therefore the business should be wary when trusting a customer with this service, as they may not repay as result of pressure and it could lead to them simply resorting to finding another supplier. June’s sales remain at £37,000 while the second quarterly costs are due, HMRC payments have risen to £12,210 as a result of higher company purchases. Total outgoings for this month are £46,233, this is higher due to aspects of outgoings such as the addition of £300 in telephone charges, £500 additional advertising costs and the continual payment of heat and lighting bills of £500. Other than this the business do not seem to be taking action against managing high costs (such as the courier for example), this demonstrates a reluctance to adapt to new situations. When dealing with their business, Sharma and Ryan should be evolving, and adapting their business to meet current demands; what suited the business three months ago may not apply currently. Sharma and Ryan may think about introducing fresh capital this month in order to improve cash flow, they may be able to use savings or take out loans using personal possessions as security.
As a small business, SIGNature Ltd. may be able to friends and family to invest in it; another possibility could be the acquiring of a new business partner to add to existing funds, in addition they may be able to offer their expertise or a fresh way of thinking which could improve the business further. July to September’s sales rise to £41,000, a £4000 increase from April to June’s sales and an £11,000 increase from the beginning of the year’s sales; inflows are appearing positive by this quarter, with outgoings remaining almost the same with the exception of higher purchases, the businesses profit margin has risen significantly. Sales have noticeably continued to rise after the end of each quarter when an additional £500 is invested into advertising, from this I can say it is clear the business has potential to improve further from the use of advertisement in order to raise brand awareness and attract new and existing customers to continue using their business. It could be that the ‘in-between’ months are not being put to best use, if Sharma and Ryan were to more regularly invest in additional advertisement it could be that the business sales would continue to rise. From this pattern it appears their inexperience holds them from reaching full potential at the rate they could if they were to consult others (such as potential investors, or any associates within the industry for example) who may be able to offer advice or assistance. Another possible alternative as previously mentioned could be the introduction of an additional business partner, preferably one already involved within the industry, to offer their expertise through knowledge and experience while contributing a new take on the running of their business. If reluctant to allow another person have a say in the running of their organisation, there is the possibility of acquiring the new partner as a ‘silent partner’, allowing Sharma and Ryan to gain funds and guidance on the running of their business without the possible disagreements on actions taken during daily activity, which in turn would reduce any stress this may have caused while benefiting from the extra help they would receive.
From October to December sales deteriorate to £25,000 with bills remaining this reduces profit margins; however, opening and closing balances continue to total at over £50,000, these large sums of money remaining each month appear positive when looking at the cash flow forecast, although this is known as an unproductive asset. The money left over at the end of the month should be banked or invested, in order to gain money from either interest earned or profit received from investment; the money lost from holding the cash could set the business back from what they could have earned if they were to have invested their money. Although many businesses try to sustain demand for their products, there may be times when it falls unexpectedly. Changes in spending habits could lead to a fall in demand, leading to fall in cash sales flowing into the company; oftentimes, trade fluctuates for seasonal reasons as it appears to have done in this case. To avoid this precautions can be taken, for SIGNature Ltd. it is thought their business would continue to strive in winter due to the nature of the organisation, additional warning road signs are likely to be needed as a result of harsh weather conditions, form this I can say that the business would be wise to invest in additional advertisement for the winter months in order to boost sales. In addition to this they may be able to provide discount in order to promote their product. This situation requires careful management of the summer months in order to regulate the winter months, although it is possible to predict these changes.
In conclusion I can say that there are many issues SIGNature Ltd. could face as a small start-up business, due to varying factors; some of which include their lack of experience in both the industry and the running of a business, despite this there are many courses of action they can take in order to improve and grow their business. In my opinion the furthering of their business could be achieved through the better management of their spending, in addition to the alteration of their operation; there were a number of outgoings the business were continuing to pay when perhaps they could have found a cheaper alternative, while when possessing large sums of money, were not taking action to make use of this. As new business owners, the partnership should work on the evolution of their business by finding new ways to do things to ensure their organisation is reaching full potential by increasing profit margins through the cutting of costs and in some cases, the spreading of them in order to achieve economies of scale, which could benefit Sharma and Ryan greatly.