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Cash is the most liquid of all the assets of a business – it represents the bank balance and the cash that the business has available on the premises (otherwise known as ‘petty cash’).

Cash flow refers to the difference between the cash flowing into the business (e.g. through sales revenue) and the cash flowing out of the business (e.g. bills and wages).

Cash flow problems

Having a positive cash flow is vital for the survival of a business, since without the ability to pay workers and suppliers then the business will soon have to cease trading.

This potential problem is compounded by the fact that businesses often have to pay many expenses several weeks or even months before any cash actually flows into the business.

For example, wages and salaries will have to be paid to employees, suppliers will have to be paid for any raw materials and the rent or mortgage payments will have to be paid before the products can be manufactured and sold to customers.

Further to this point, if the products are sold on credit to

customers, then the time delay between the cash outflows and the cash

inflows will be even longer.

The major causes of cash flow crises for a business are:

1) Overtrading – where the business attempts to expand too rapidly,

without a sufficient financial base.

2) Having too much money invested in stocks.

3) Allowing too much credit to their customers.

4) Unexpected changes in demand for their products.

5) Overborrowing – therefore having large monthly loan repayments,

which have to be met.

There are many actions that a business can take when it is

experiencing a liquidity crisis:

1) Offering price discounts to boost sales and sales revenue.

2) Selling off fixed assets.

3) A ‘sale and lease back’ arrangement.

4) Chasing debtors for the monies owed to the business.

5) Selling off stocks.

Whatever action is decided upon, the business must ensure that it is

implemented...