Production or purchasing usually in advance of seasonal peak in demand = cash outflows before inflows. Seasons cause different demands for customers so products have to be suitable. This can be problematic for a business’s cash flow because demands changes at the amount of stocks that are needed can change, sometimes the predicted sales are not met which will leave a dent to the business. However these issues can be managed by experience so that the business can predict what can happen on the following year. References Jim Riley.
If there is too much inventory, then high costs will become a problem and hurt your bottom line. At the other end, if you try to save too much money by keeping inventories dangerously low, it may create stock-outs. These can infuriate your clients
Third, a firm under intense cost or competitive pressures, which does not see IT as its core competence, may find outsourcing a way to delegate time-consuming, messy problems so it can focus scarce management time and energy on other differentiators. Next, several financial issues can make outsourcing appealing. One is the opportunity to liquidate the firm’s intangible IT asset, thus strengthening the balance sheet and avoiding a stream of sporadic capital investments in the future. Also, outsourcing can turn a largely fixed-cost business into one with variable costs. This is particularly important for firms whose activities vary widely in volume from one year to another or which face significant downsizing.
Furthermore, the firm is likely to incur costs and suffer penalties if it is not able to pay the interest and principles on time. This may result in legal outlays, interruptions in the operation and likely loss of profitable investment opportunities. As the proportion of debt in the capital structure increases, so does the probability of sustaining these costs. Thus redundant use of debt may lead to rise in cost of capital owing to the financial risk which in turn may reduce the value of the firm. This risk arising due to excessive use of debt is known as bankruptcy.
Such a situation could give rise to several costs such as financing at higher interest rates, opportunity cost of projects and laying off employees which would result in less productive employees. Together costs like these could be termed as financial distress costs. As the cost of borrowing increases with higher interest rates for casinos under financial distress they find it difficult to raise funds for long-term plan execution. This could potentially cause problems if the casino is trying to diversify its offerings or expand its reach globally. Also satisfying short-term obligations in times of financial distress could hurt long-term projects.
However, once the market stabilises, assets and liabilities will be revalued at their original levels. This makes reports of gains and losses temporary which can be misleading to potential investors (Penman, 2007). Fair values being unreliable as they are difficult to estimate especially if the market is illiquid. And reported losses producing further losses which increases the overall risk of the financial system. For example, if the current market price for an asset drops and thus revaluing the asset downward, people might begin buying this asset at even more lower prices (Benston,
Breach of contracts can have serious damages for businesses. An expected service or agreement that is no longer met or kept impacts everyone involved. A breach of contract can reduce earnings while also potentially harming future profits. It also puts a company’s value at risk if they cannot meet demands for products or meet deadlines. There are often damages that result from contract claims and breaches.
Stock out Rate Stock out also known as exhaustion of inventory is a situation when demand exceeds the stock available with the company to cater the existing demand. The main reasons for the stock out are the forecast inaccuracy and keeping the inventory below the optimum level. Stock out rate can be measured by dividing the orders that have not be fulfilled due to stock out divided by total number of orders received. Stock out leads to loss of sales and customers loyalty but the degree to which it will impact the company depends on the rate at which the stock out occurs, the present terms with the customers and the availability of the substitutes. If the company can provide the customer with a substitute product of the stock out product then the degree of loss due to stock out will be much lesser.
Therefore, the company looses cash, which could aid further business operations. Increase numbers of creditors - countless businesses acquire credit to operate, however, too much credit can become a problem for a business, especially, if it also offers credit to customers. This is because you’re ability to pay your credit is dependent on whether your debtors pay you in due time. Therefore, in case they don’t, the business will surface cash flow problems. Over-financing – excessive borrowing to finance your business can result in higher interest rates and tougher repayment schedules and this can lead to cash flow challenges.
So as you can see, the price quoted by the flooring contractor hinges on several variable cost factors. It can be a difficult task as the contractor begins his business. If he underestimates the time required to install the tile or to do any of the preparation work, he may end up losing money. If he fails to order enough materials, then he will have to cover the cost of any additional materials needed, reducing his profit. If mistakes are made, then the cost of fixing them will reduce the amount of profit he earns.