Analyse the cash flow problems a business might experience Essay
Analyse the cash flow problems a business might experience
In this assignment I will be analysing that a business might experience if their sales figures turn out to be lower than the ones that they have expected or predicted. 1.1 problems of cash flow forecast
Cash flow forecasts are something really important for a business and something that is a part of a business plan. A cash flow forecast is a plan for the future it will tell you whenever the costs are going to be raised over the year. It can also tell you what the business revenue is going to be and what the business performance for the following year is. Problem 2
From what I can see on Ricky’s cash flow is that he is relying on that one loan which is his capital that he begins with too and that is £17,500 from the first month which is January. Bank loans are great for starting a business but that does not mean that they can not let you down in this case a bank loan can fail Rick because if the bank loan gets delayed or no longer available then this is a big problem for Rick because he cannot do anything best way to explain this would be he would not be able to pay for the truck which is £20,000 and not only the truck that would not be paid for but the sales cost would not be covered. His total payments only for the beginning of year which is the month January his total payments are £22,475 with this type of problems or should I say impacts that can happen there is no way that his business would survive.
Another critical problem that can occur from that cash flow is if the sales figure is lower than the actual sales figure. For example the sales figure that has been predicted by Ricky is £60,000 but let’s say that he actually gets £40,000 as his total figure for his sales. This is a major problem simply because what he as predicted to get for his sales has not been met and £40,000 worth of sales would not be enough to keep his business running regularly. Costs for everything would not be covered just because of this problem which again is very crucial for the business and of course loss would occur there is no way that Rick would make any profit due to this problem. In addition the business would have to start the new month with a loss and again this is just because the total sales are low this would yet again mean that he cannot cover the costs for that month and he would have a greater loss that he would not allow him to recover fast enough for the next month in order for his business to be still up and working.
Looking at Rick’s cash flow forecast I can see that there can be another problem that can occur and this problem is to do with his expenses and that is if his expenses turn out to be lower to what the actual expenses appear to be this can cause him not only a problem but a failure to his business because his expenses are £71,750 and lets say for example they actually come out to be 81,950 this is where the big problem will occur because his expenses are higher and this would lead to Rick not being able to cover for the next year. Plus if the expenses go up in any month of the year this would decrease the chance of Rick gaining any type of profit and the balance would be different for the next month by all means this would affect the profit and balance within the business. 1.2 recommendations and solutions to the problems
Solution to problem 1
Possible solution that Rick has for his bank loan problems is that he can either make sure to use his own savings that he has saved through out the years and that’s if he has saved any money in his savings account but probably the best and I would say most common way to get the money you need is if you ask friends to get you a loan or someone from the family to lend you money. He could also decide to get a small over draft which would keep his business running. Yet again lest not forget an overdraft has its disadvantage and that is when it come to paying back that over draft the interest rate would be high so he would have to think of a way to pay that off and it would not be an easy task for Ricky. Of course Ricky has the option of selling his own assets but that is just an option that could be left for last. In general I would recommend for Ricky to get a loan from his family or friends because in my opinion that is the best possible decision and the best possible way from him to get his business up and running.
Solution to problem 2
For the second problem there is a solution but this would have to be done correctly by Ricky and the solution is advertisement IF any type of business is looking to increase their sales the best way possible is to make sure to advertise their services a lot and reason being is to make sure that they let their customers know what they have to offer. Yet again we have to look at this from Ricky’s perspective what I would recommend for him to do is whenever he decides to advertise the best thing to do is to make sure he keeps his prices low because first of all this would give him an opportunity to show people what his business has to offer and second of all he would not have to pay a great amount of money to get his services advertised.
Solution to problem 3
Another solution to his second problem would be if Ricky uses appropriate pricing such as low prices on the services he has to offer. That due to the fact that he is just starting his business it is not very known to people that are regular customers to other businesses and low pricing is the only way that he would gain customers. In addition this relates to his advertisement solution because if he advertises that his services are on low prices people would have more interest into going to see what Ricky’s business has to offer. I would also recommend for him to put his prices up only if his business is succeeding with the sales then he would be able to increase sales even more by doing this.
Solution to problem 4
Solution to Ricky’s final problem would be for him to make sure that he monitors his expenses and by doing that he would be able to control them. What I would recommend for Ricky to do is to keep budgets this would help him to keep the costs in those fixed budgets by doing this Ricky would not overspend and he would keep the very most important thing in the cash flow chart low and that is his payments figure. The way that he can stay within his fixed budget is by doing this. For example his budget is £80 000 and as we know his forecasted total expenses are £71 750 he would be left out with £8250 which he can use for next year to either to expand the business or to improve on some things that the business needs and he can make the budget lower for next year.
Another solution to his final problem is to find new suppliers or the best way is to make sure he buys his tools that he needs at a lower price. This would help him and his business so much it will actually make his business run fluently at the begging because that is what he wants so by him keeping the tool price low and this would mean that his costs are low too then at the end he is left with his expenses which will be low too and this could mean that they can match the figure that he has predicted on his cash flow forecast.
In conclusion I have learnt that whenever you want to start a new business you would not only have to make a cash flow forecast but you would most defiantly have to predict the problems that might occur and how would you as a business man stand up to these problems and solve them and you would also have to know how to make sure these problems never occur in order for your business to be running smoothly.