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Revise Lecture 24. Managing Cash flow Shortages. 3 Approaches Moderate approach Conservative approach Aggressive approach. Managing Cash flow Shortages. Moderate approach

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managing cash flow shortages
Managing Cash flow Shortages

3 Approaches

  • Moderate approach
  • Conservative approach
  • Aggressive approach
managing cash flow shortages1
Managing Cash flow Shortages

Moderate approach

  • Long-term funds finance permanent assets. Short-term funds finance non-permanent assets. Maturity of the funds matches the maturity of the assets. A balance between risk & return can be achieved by a moderate approach
managing cash flow shortages2
Managing Cash flow Shortages

Conservative approach

Less risky & less profitable than moderate policy. Fixed, permanent current assets, partly fluctuating assets financed by long-term funding

managing cash flow shortages3
Managing Cash flow Shortages

Aggressive approach

  • Increased risk of liquidity & cash flow problem. Some current assets and all fluctuating current assets financed by short-term sources
how to manage stock
How to manage stock?

Different models can be used for stock management

  • ABC model / system
  • Economic order quantity model
  • JIT (just-in-time)
just in time jit
Just in time - JIT
  • JIT is a system of manufacturing and supply chain techniques that aim to minimise stock levels and improve customer service by manufacturing not only at the exact time customer require, but also in the exact quantities they need and at competitive prices
just in time jit1
Just in time - JIT
  • JIT is a philosophy which involves the elimination of inventory. According to JIT, inventory allows a firm to compensate for inefficient processes, its failure to deal with its inefficient processes are seen as hidden costs.
  • This involves the elimination of all activities performed that do not add value = waste
just in time jit2
Just in time - JIT

JIT achieved by:

  • Reducing batch sizes
  • Delivering raw material stock to point of use
  • Designing shop floor for seamless movement of WIP
  • Emphazing total quality
  • Reducing finished good level by making to order
just in time jit3
Just in time - JIT

Advantages of JIT

  • Management seek to eliminate waste at all stages of the manufacturing
  • Stronger relationship between buyer and supplier. (Security to supplier who benefits from regular orders, continuing future business.)
  • Buyer – lower holding costs, lower investment in stock & WIP, bulk discount 10/30
just in time jit4
Just in time - JIT

Advantages of JIT

  • Emphasis on quality control in production reduces scrap, reworking and setup cost
just in time jit5
Just in time - JIT

Disadvantages of JIT

  • JIT may not run as smoothly in practice as theory may predict, unforseen delays.
  • Buyer is also dependent on the supplier, if supplier rise prices of his product?
accounts receivables
Accounts Receivables
  • How to manage accounts receivables?
accounts receivables1
Accounts Receivables
  • The decision to offer credit can be viewed as an investment decision, resulting in higher profits. For many businesses offering generous payments terms to customers is essential in order to be competitive.
accounts receivables2
Accounts Receivables
  • 4 key areas of accounts receivable management are;
  • Formulation of policy
  • Assessment of creditworthiness
  • Credit control
  • Collection of amount due
4 key areas of ar debtors
4 key areas of AR (Debtors)

Formulation of policy

A framework needs to be established

Terms of trade

  • Period of credit offered
  • Early settlement discounts

Must consider whether to charge interest on over-due accounts

4 key areas of ar debtors1
4 key areas of AR (Debtors)

Formulation of policy

  • Credit to new customers (procedures)
  • When accounts become overdue (what action?)
4 key areas of ar debtors2
4 key areas of AR (Debtors)

Assessment of creditworthiness

A firm should assess the creditworthiness of;

  • All new customers immediately
  • Existing customers periodically
4 key areas of ar debtors3
4 key areas of AR (Debtors)

Assessment of creditworthiness

  • New customer needs to be analysed
    • Bank references
    • Trade references
    • Credit agency references
  • High credit being granted High possibility of repeat business therefore more credit analysed is needed
4 key areas of ar debtors4
4 key areas of AR (Debtors)

Credit Control

  • Payment records must be monitored continually
      • Depends on successful sales ledger administration
  • In-house credit rating
  • Regular investigate aged debtors report
    • Breaches of credit limit should bring immediately to the attention of credit controller 20/30
4 key areas of ar debtors5
4 key areas of AR (Debtors)

Collection of amount due

  • Agreed procedures for dealing with overdue accounts
    • Reminder, final demands, chasing by phone, making a personal approach
  • Debt collecting agency or last resort take legal action
  • What is factoring?
  • Factoring is the outsourcing of the credit control department to a third party
  • Factoring is the way of speeding up the receipt of funds from accounts receivable

The company can choose some or all of the following three services offered by the factor;

  • Debt collection and administration (recourse or non-recourse)
  • Financing
  • Credit Insurance

The company can choose some or all of the following three services offered by the factor;

1. Debt collection and administration (recourse or non-recourse)

The factor take over the whole of the company’s sales ledgers, issuing invoices and collecting debts 25/30



  • The client loses control over decisions about granting credit to its customers.
  • Therefore some client prefer to retain the risk of irrecoverable debt and opt for a ‘with recourse’ factoring service.
  • With this type of service the client decides whether extreme action (legal action) should be taken against a non payer. 26/30

Credit Insurance

  • The factor agrees to insure the irrecoverable debts of the client. The factor would then determine to whom the company was able to offer credit. 27/30


  • The factor will advance up to 80% of the value of a debt to the company, the reminder being paid when the debts are collected.
  • Finance cost 1.5% to 1.3% 28/30


  • Saving in administration costs
  • Reduction in the need for management control
  • Particularly useful for small and fast growing businesses where the credit control department may not be able to keep pace with volume growth 29/30


  • Likely to be more costly than an efficiently run internal credit control department
  • Bad reputation: using factoring may suggest your company has money worries
  • Customers may not wish to deal with a factor
  • Once you start factoring it is difficult to revert easily to an internal credit control system
  • The company may give up the opportunity to decide the whom credit may be given.