Solving Short-Term Cash-Flow Problems (Cambridge International IGCSE Business)
Exam board Cambridge International · IGCSEUpdated 2025-06-12
Overcoming short-term cash-flow problems
Spec point — • How a short-term cash-flow problem might be overcome, e.g. overdraft, delaying supplier payments, asking debtors to pay more quickly
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Liquidity is the ability of a business to meet its short-term commitments (e.g. payments to creditors) with its available assets
- A business that cannot pay its bills will usually fail very quickly, even if profitable
- Managing liquidity is a key way to manage risk in a business and helps a business prepare for the unexpected
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Many businesses experience short-term cash-flow problems
- Start-ups initially have high costs and low sales revenue
- Existing firms may unexpectedly receive a large order that requires them to buy and pay for a large amount of raw materials
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There are several ways in which a short-term cash-flow problem can be resolved
Solving short-term cash-flow problems
Asking a supplier to increase the amount of trade credit they offer is one popular solution to ensure raw materials keep flowing into the business
- A business often uses more than one method to ensure cash-flow remains positive, e.g. combining an overdraft and reducing the time period available for their customers to pay them
Methods used to overcome short-term cash-flow problems
| Method | Explanation |
|---|---|
| Seek to increase the trade credit period | - The business may approach some of its most trusted suppliers and ask them for more generous repayment terms - E.g. They may request their suppliers to extend the repayment period from 30 days to 90 days |
| Shorten debtor repayment periods | - If the business offers customers the ability to 'buy now, pay later', this delays the cash inflow. Removing the option to pay later will improve cash-flow - However, the business may lose some customers to competitors who are able to keep offering credit terms |
| Apply for a bank loan | - Businesses can often arrange short-term bank loans in a very short time frame, often a couple of days - Interest will have to be paid |
| Delay plans to purchase new equipment | - Postponing the purchase of new equipment, such as vehicles, may significantly reduce cash outflows |
| Only sell in cash, not credit | - Businesses can choose to only accept cash as payment, meaning it receives money immediately - Customers may buy from competitors that sell on credit instead |
| Overdraft facility | - Temporary cash-flow problems can be solved by arranging to spend more than the business's current account balance - Interest rates may be relatively high, increasing business costs |
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