Name and briefly explain five ways in which cash flow problems may arise

CPA-Financial-Management-Section-3 Revision kit

Cash flow problems can arise in the following ways:
(i) Making losses. If a business is making loses it will eventually have cash flow problems. The time taken to experience cash flow problems this way depends on the size of the losses and the magnitude of depreciation.
(ii) Inflation. In periods of inflation a business will need over-increasing amount of cash first to replace used up and worn-out assets. A business may be making a profit in historical cost accounting terms but not receiving enough cash to replace assets it needs.
(iii) Growth. When a business is growing, it needs to acquire more fixed assets and to support higher amounts of stocks and debtors. Those additional assets must be paid for somehow in cash.
(iv) Seasonal business. A business is likely to have cash flow problems during certain periods of the year.
(v) One-off items of expenditure. This can be an occasional non-recurring item of expenditure that creates cash flow problem of repayment of a loan capital after maturity of a debt.
(vi) Poor working capital management policy

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