cash flow problems

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shelle
shelle Registered Posts: 27 Regular contributor ⭐
in AAT Level 4 (Level 8 in Scotland)
i know i am going to sound really stupid but could someone explain why an increase in debtors and creditors without an increase in turnover suggests a cash flow problem, hjave been sat for ages try to put the right words in my head but just seem to be confusing myself lol:blushing:

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  • Peter W
    Peter W Registered Posts: 22 New contributor 🐸
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    It suggests that debtors are taking longer to pay, which is causing a shortage of cash such that the business is having to pay its creditors later.
  • A-Vic
    A-Vic Registered Posts: 6,970 Beyond epic contributor 🧙‍♂️
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    shelle wrote: »
    i know i am going to sound really stupid but could someone explain why an increase in debtors and creditors without an increase in turnover suggests a cash flow problem, hjave been sat for ages try to put the right words in my head but just seem to be confusing myself lol:blushing:

    or a credit control problem bad debt/ bad payers therefore reducing cashflow
  • AdamR
    AdamR Registered Posts: 668 Epic contributor 🐘
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    An increase in debtors is bad news as it means the money isn't in your bank account, its in the customers. For example, if you started the year with no debtors, sold goods totalling £1000 but didn't receive any money, you have a negative cashflow situation.

    An increase in creditors is sort of good news - if you owe more to creditors, the money is still in your bank account so that improves cashflow. However, big increases in Creditors often mean the person is struggling to pay their debts.

    Hope this helps.
  • PGM
    PGM Registered Posts: 1,954 Beyond epic contributor 🧙‍♂️
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    AdamR wrote: »
    An increase in creditors is sort of good news - if you owe more to creditors, the money is still in your bank account so that improves cashflow. However, big increases in Creditors often mean the person is struggling to pay their debts.

    Hope this helps.

    Although as mentioned, it can mean a lack of ability to pay them. Therefore keeping creditors high helps keep money in the bank when debtors aren't coughing up.

    Might be best to calculated debtors/creditors days for both periods and see how trends are changing?
  • shelle
    shelle Registered Posts: 27 Regular contributor ⭐
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    thank you this helps me loads i couldnt seem to sum it up but new what happens if that makes sense. thank you :)
  • Paul24
    Paul24 Registered Posts: 578 Epic contributor 🐘
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    If you have any further problems with this area, read over the working capital cycle, which should help you to visualise such a situation, and identify areas of concern.

    Paul

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