Strategies to Improve Cash Flow (DP IB Business Management)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
The Relationship Between Investment, Profit & Cash Flow
Business investment involves the purchase of assets that are expected to create value over time
E.g the purchase of new machinery will improve productivity or quality which may allow the business to sell more items at a higher price and this increases sales revenue
Financial investment may include the purchase of shares, bonds or property with the expectation that they will gain value over time
For some businesses this is an important source of income alongside their core business activities
E.g. US supermarket giant Walmart owns and leases over 10 thousand residential and commercial properties worldwide which act as as important added revenue stream for the brand
Investment, profit and cash flow differ over the lifetime of a business
Diagram: cash flow and profit over time
Strategies to Improve Cash Flow
The best way to improve cash flow is to manage the business better
Use cash flow forecasts to identify potential cash flow issues before they arise - and take appropriate action
Budget effectively and consider adopting zero budgeting to carefully control spending
Set clear financial objectives and look for ways to reduce outflows and increase inflows wherever possible
E.g. Global conglomerate 3M, maker of Post-it Notes announced in early 2023 that it intends to raise prices and cut about 6,000 jobs to improve its profits and cash flow position
A business can also have too much cash
If a business is holding large amounts of cash it is likely to be missing out on the benefits of investing it in fixed assets or investments
This may represent a significant opportunity cost especially when interest rates are high
Methods to Improve Cash Flow
Method | Explanation |
---|---|
Reduce the credit period offered to customers |
|
Ask suppliers for an extended repayment period e.g an extension from 60 to 90 days |
|
Make use of overdraft facilities or short-term loans |
|
Sell off excess stock |
|
Sell assets and lease fixed assets instead (e.g. sale & leaseback |
|
Introduce new capital and reduce drawings from the business |
|
Last updated:
You've read 0 of your 10 free revision notes
Unlock more, it's free!
Did this page help you?