3.5.3 Making financial decisions: sources of finance

Internal and external sources of finance

Advantages and disadvantages of different sources of finance for short and long term uses

ADD IN SOURCES OF FINANCE TABLE

3.5.4 Making financial decisions: improving cash flow and profits

Methods of improving cash flow

Causes of poor cash flow:

Poor management – a manager may not have sufficient financial training or experience and end up making decisions that negatively affect cash flow
The business is making a loss – the business is receiving less revenue than they are paying out in costs. This makes the payment of bills very difficult
Offering customers too long to pay – if you have to pay your bills before you receive payment from your customers you are likely to experience a cash shortage
Over optimistic forecasting – firms are sometimes over optimistic when forecasting their cash flow. Essentially, they could end up spending money they don’t have because they think they will make it back in the future (according to their forecast)

How to improve cash flow:

Cut costs
Use an overdraft
New source of cash inflows
Reschedule payments

For cash flow to be healthy, firms want long credit terms from suppliers and want to collect money from debtors as soon as they can. They will need sufficient working capital to make sure they can pay all the bills