M1 Assignment 2 Corey Freeman * Why a business might experience cash flow problems * Why this can cause difficulties * Any potential dangers you can see specific to signature’s cash flow forecast
M1: Analyse the cash flow problems a business might experience.
A cash flow problem arises when a business struggles to pay its debts as they become due.
Note that a cash flow problem is not necessarily the same as experiencing a negative cash flow. A business often experiences a net cash outflow, for example when making a large payment for fixed ]assets or where there is a seasonal drop in However, when cash flow is consistently negative and the business uses up its cash balances, then the problems become serious.

The main causes of cash flow problems are:
Profits or losses – there is a link between profits and cash flow problems
Over investment in capacity – this happens when businesses spend too much on fixed assets. Production capacity which doesn’t get used does not generate revenues, so often is a waste of money.
Too much stock – if you hold too much stock ties up cash and then increases the risk of stocks becoming obsolete.
Overtrading – this happens when a business expands too quickly. This then puts pressure on short-term finance.
Giving customers too much credit – customers who buy on credit are called trade debtors offering credit to customers is a good way to build revenue, but late payment is a common problem and slow-paying customers put a strain on cash flow.
Yearly demand – predictable changes in the yearly demand create cash flow problems – but because they are expected, a business should be able to handle them.
Lack of Payment Term Discounts
Waiting for a customer to pay once you’ve delivered a product or