Justify recommendations on ways in which problems with cash flow, working capital, costs and budgets and break-even may be addressed
I am the assistant financial manager of PWC and I have been asked by my manager to write a report for one of our profitable clients Nike. I will evaluate and justify recommendations on ways in which problems with cash flow, working capital, costs, budgets and break-even may be addressed for them. The first thing they need to consider is cash flow. Cash flow is the movement of cash going in and out Nike over a period of time. Nike may encounter a problem with having low profits or losses which can effect cash flow.
I recommend that Nike increase their selling price of their products. If their prices increase their sales revenue will increase leading to an increase in profits. Howeve...
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...r, Nike must be aware, if they increase their prices to high, it could lead to a lower demand in their products, which will lead them back into losses. Furthermore, I suggest that Nike reduce their costs. They can do this by finding cheaper supplies or making some staff redundant. If Nike can reduce their costs it will mean that not as much money needs to be paid out which will improve cash flow.
Furthermore, allowing customers too much credit will cause cash flow problems because they won’t be gaining the cash they need. Therefore, I suggest having a cash only policy. This would be good as they would always gain their cash for their products, and wouldn’t have to worry about people not paying them. However, this may lead customers going elsewhere. Alternatively, they could use a credit factoring service with their debtors. This would mean they will gain cash, improving cash flow. Or another way to resolve cash flow would be to chase up bad debts. Nike could have a solicitor threaten legal action.
This will persuade Nike’s debtors to pay their debts and Nike will gain the cash that’s owed. Furthermore, Over-investment in capacity can lead to cash flow problems; this happens when a business spends too much on fixed assets such as machinery and premises; these assets are very expensive. Therefore, I suggest that Nike lease fixed assets. This would be a cheaper alternative and if it breaks down the leasing company is responsible. However, if Nike already own many fixed assets, they could sell the assets that are unused; this will help them gain cash preventing less cash flow problems.
Additionally, holding too much stock will lead to cash flow problems; this will be tied up as only when they sell their stock will they be able to gain the cash for it. Therefore, I suggest that Nike estimate a reasonable amount of stock they will sell; they can do this by looking at their previous sales to determine their production levels. From this they will see how much they sold and base that information on the amount of stock they buy to ensure they sell all of it. Moreover, over trading can lead to cash flow problems.
Over trading happens when they open up stores to quickly which costs lots of money. I suggest that Nike do market research to ensure that any store they open will be profitable. From this Nike will know if there is a demand for their store and they can decide if they want to open a new store. This will help with cash flow problems because they won’t be using money on unnecessary things that won’t provide a profit. In addition, unexpected changes will lead to cash flow problems. For instance, a machine may break down. Therefore, I recommend that Nike lease their machinery.
This is because if it breaks down it will mean that the leasing company is responsible not Nike. So, Nike wouldn’t need to pay to repair or replace the machine which can improve cash flow. Lastly, seasonal demand can lead Nike to cash flow problems. Therefore, I recommend Nike to have promotions. For instance, they can sell their summer stock in winter with promotions. Promotions could include buy one get one free or half price off. This will help with cash flow problems as they can get rid of stock that may be hard to get rid of initially.
Working capital can become a problem if it becomes insufficient. Working capital is the cash available to a business that allow them to operate on a day-to-day basis. Insufficient working capital means that Nike will be unable to take advantage of new opportunities or adapt to changes. It also means that trade and cash discounts are lost and Nike will be unable to offer a credit line. As well it means financial reputation is lost due to not paying and creditors may apply for court action. If Nike face these problems, I suggest to employ a good collection system.
This could include adopting a cash only policy so that Nike always gain their cash for their products. Or they could also hire a solicitor to threaten court action to gain cash from debtors who haven’t paid. Furthermore, I also recommend Nike to offer quick payment incentives. By having incentives, such as a discount for paying early will encourage customers to pay earlier and will help with working capital. Moreover, Nike can reduce their fixed costs to help with insufficient working capital. Nike can do this by finding cheaper suppliers. For instance, they can find a cheaper mortgage payment or electricity.
Also they can reduce variable costs. They can do this by finding a cheaper supplier for their raw materials. Nike should also manage their inventory well. Nike should ensure they only buy the stock they know they will sell; they can do this by looking at previous sales. Lastly, Nike can solve working capital problems buy increasing their sales revenue. They can increase sales by using promotion and marketing. This will all help gain more cash to go towards working capital. Costs are another thing Nike need to consider for business survival.
Costs are an amount that has to be paid or given in order to get something. A problem Nike may face with costs is that their raw materials may increase. Therefore, I suggest Nike find cheaper suppliers so that they can keep their prices the same which will mean they won’t lose any customers as still gain cash. Another problem they may face is that fixed costs must be paid. Therefore, I suggest Nike have reserve funds in case this happens to ensure that they can always pay them. Or they could obtain an overdraft to gain the cash to pay the costs.
Furthermore, costs are estimates and may vary from actual costs therefore I suggest Nike look at previous cost data when dealing with cost figures. This means they will have an idea of how much you spent previously which will give you a more realistic estimate meaning they won’t have a problems with budgets and break-even. Additionally, costs can be calculated inaccurate which can effect budgets break even and cash flow forecasting. Therefore, I recommend have a team involved including qualified accountants. This will ensure they won’t have any other problems and will be more efficient and profitable.
Another factor Nike need to take into consideration is budgets; a budget is a financial plan to achieve a certain target. Budgets can be inaccurate and can lead to problems. Therefore I suggest Nike have a team involved including qualified staff to calculate the budget. This will ensure the budget is accurate and won’t lead to any problems. Furthermore, budgets can be unrealistic. If budgets are unrealistic it can demotivate employees; this is because they will have to work hard to ensure they don’t go over the budgets, but this may be impossible and could lead to lots of stress.
Therefore I suggest that Nike’s managers consult with their staff. This means they can get realistic budgets that staff can work with which could reduce stress and motivate them more leading to more efficient work. Budgets can also restrict business activity which may lose the firm business. Therefore I recommend that Nike are more flexible. For instance, if the raw materials selling price goes down, they should buy more than budgeted as they could sell more leading to more profit. Break-even is another factor to consider. Break-even occurs when the total costs are equal to the total revenue.
The break even model isn’t always accurate, this is because break-even is based on a number of assumptions. For instance, costs will remain the same. However, this isn’t true as raw material pricing is always increasing. Therefore, I suggest Nike to find cheaper suppliers or increase their selling price of their products to maintain the same break-even point. Moreover, break-even assumes all the output can be sold in which could cause problems if Nike do not sell on their products. Hence I suggest Nike to use previous data to determine output sales so they don’t have too much stock and can ensure they sell it all.
This means that their break-even point will be correct and useful. Furthermore, each product has a breakeven point which means it is very time consuming therefore, once again I suggest hiring a team which will make the process faster. Lastly, it may be inaccurate. Therefore employing a team of qualified staff including cost accountants will ensure data is accurate; this will make Nike work more efficiency. In conclusion, if Nike take the solutions I have suggested when they face problems, they will be able to run their company successfully and efficiently.