Strategies to Improve Cash Flow (DP IB Business Management)

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