Is the Rapid Growth of Eggcentric Ltd the Major Cause of the Company’s Cash Flow Problems
Business and Management
Submitted By Hermansingh
Is the rapid growth of Eggcentric Ltd the major cause of the company’s cash flow problems? Justify your view.
Cash flow is the movement of cash into and out of a business over a period of time.
Eggcentric Ltd is a fairly new company which is supplying high quality/high price products and is now extended its product range. Despite intense competition from competitors, sales have risen annually by an average of 70% this could be a significant cause as overtrading can create cash flow problems as they may not have planned for rapid growth which is essential to avoid this.
The business is a seasonal business as 73% of the sales occur between May and September; this can create cash problems for businesses for several reasons. If a business is expecting to sell a certain amount in a time of the season factors such as weather can affect sales. The business may also be expecting a growth in sales in a certain season so may stockpile, this means that valuable cash and resources are tied up in stock which can create problems in cash flow.
Eggcentric Ltd agreed to supply B&Q with stock which is the largest DIY store in the UK however the deal was that they wanted high levels of stock in all stores and wanted 60 days’ trade credit. The fact that Eggcentric Ltd has to pay for raw materials and manufacture the good but then may not receive payment for them until sometime after they have been sold can cause cash flow problems. On top of this poor credit control may also be a factor as it allows debtors to take longer to pay than the agreed credit period. This will force the Eggcentric Ltd to borrow funds in order to finance production, short-term borrowing in the form of an overdraft is expensive and a cash drain on the business and Eggcentric Ltd is already having problems with managing their cash position and has had to ask for increases in its overdraft limit....