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Busies Aqa Unit 3

In: Business and Management

Submitted By benathairoun
Words 421
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Discuss which poses the greater threat to Warwick Clothing’s future success: problems with cash flow or low levels of profitability?

Cash flow is the money that is flowing in and out of the business, whilst the profitability is the ability of a firm to make profits.

On the one hand I believe that cash flow problems do create a great threat to the future of the business. The company has exceeded is overdraft limit numerous times which means that they won’t have the money to pay their suppliers of materials, especially if there are also long credit terms. 90 days to get paid by the airline company is a long time and means that instead of focusing on quality products, the manager has decided to implement them and in some cases resort to sub-contracting as he believes that this will create products quicker, meaning that they will sell quicker, leading to a better cash flow. However, although this is potentially true, these cash flow problems in the first place have lead to a 15% increase in customer complaints as the quality of the product has declined due to mass producing them for cheaper.

On the other hand, the profitability of the business is that which poses a greater threat to the future success of the business. If the business is making low profits, then this means that they will have little money to re-invest into their business (or pay dividends), which means that the size of the firm is unlikely to increase. The 2.5% net profit margin shows that they are making very little profit and so if we look towards the long term for Warwick, they will need to improve this in order to grow as a company, gaining economies of scale which should therefore make them more financially stable.

Cash flow poses a huge threat to them as they have lots of costs to cover; labour, material and fuel costs. I think in terms of success it poses the question whether they...

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