Question 1

Cash flow problems are a major cause of insolvency and it is often created by the delay in payments by customers. Cash flow planning involves making sure that a business generates enough cash at the right time to meet pressing liabilities.

For example, many manufacturing businesses have a cash cycle. They buy raw materials (parts) on credit and then manufacture goods, which they store as Inventory (stock). They then sell these goods on credit (funds, which may be due for payment from 1-3 months time). In the meantime, they have overheads and a workforce to pay. A problem for traders is that they expect credit customers to pay on time. This provides the cash to continue the credit cycle and to pay wages and other outstanding bills. Unfortunately, the cycle often breaks down because creditors are slow to pay. This leaves the firm with a cash flow problem.

a) Based on the information above, it has always been companies aim to have a favourable receivables turnover ratio. Discuss six strategies that can be implemented to reduce its receivable turnover in days.

b) You are a junior accountant in a Commercial Bank. Your senior accountant has asked you to prepare a report on whether to approve a loan of a well-established SME. Discuss five (5) factors you will be examining the SME before you decide whether to approve/decline a loan.