Understanding Cashflow Essay

1177 words - 5 pages

Understanding Cashflow

Within an organisation, money comes in and flows out. This is called
the organisation's cashflow.

From time to time, business managers may pose questions such as:

* 'Can we afford to buy x?'

* 'Are we going to be able to pay that bill?'

* 'Wouldn't it be nice if we could develop y?'

To answer such questions, they will often have to carry out some form
of financial planning, and often to seek additional finance from
outside the company. The key issues are:

* What is the finance for?

* How long will it be needed?

* Is it affordable, i.e. can the firm keep up with the repayments?

Common methods of finance

Sources of finance fall into two main categories. Short-term finance
is designed to be paid back quickly, while long-term loans may be paid
over many years.

Short Term

Long Term

Trade credit

Mortgages

Factoring

Profit retention

Leasing and hire purchase

Venture capital

Loans

Equity

Trade credit

This is a useful source of finance provided by suppliers. With trade
credit, a business can use the goods or service provided by suppliers
before they are paid for.

The credit period is simply the period between receiving a good or
service and paying for it. Although no charge or rate of interest is
attached to trade credit, cash discounts may be lost if payments are
not made within the agreed time.

Overdraft

An overdraft is probably the most frequently used solution to cashflow
problems. The bank sets an agreed limit on the customer's bank
account, beyond which they will not draw. This is called an overdraft
facility. The amount the customer borrows is called an overdraft.

A special charge is made for setting up the overdraft on a daily
basis. Businesses often depend on customers paying bills promptly.
Given that customers like Ron Rust may delay payment as long as
possible, an overdraft can be a useful form of short-term business
finance.

Factoring

Trade debts mean that money can often be tied up for as much as sic
months. For a business requiring cash quickly this can be a real
problem. A factoring company may offer immediate payment of part of
the amount owed to a business - normally around 80% with the balance
being paid when the debt is settled. This provided an immediate way
for a business to improve its cashflow. In return, the factoring
company will charge a fee which includes interest and administration
charges.

Leasing and hire purchase

There are many different ways for customers to receive goods and make
payments over time.

Goods on hire purchase remain the property of the finance company
until the customer has made all the payments. Other credit purchasing
schemes enable the goods to belong to the customer from the...

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