Question

A growing business typically has cash flow problems because profits tend to be reinvested back into the business. Describe how you would solve that.

Answer 1

Since it is a growing business loans can be taken whose after tax cost is less than the cost of the funds which are ploughed back. As ploughed backs are part of equity whose costs are higher than tax adjusted debt taking loans will increase cash flow.

By discussing favorable terms with creditors and debtors the account payable and account receivables can be managed to increase cash flow. If account payable days are increased and account receivable days are decrease cash flow will increase. Proper Working capital management can increase cash flow.

In case of inventory in business inventory management should be done by increasing inventory turnover which will free lot of cash for the business.


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