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Concept Version 7
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Cash Flow

Cash flow is extremely important to firms as this is how they buy goods, pay employees, fund new investments, and pay dividends.

Learning Objective

  • Identify the different pricing strategies for generating cash flow in an organization


Key Points

    • Some companies will set prices so that they can recover cash flow as quickly as possible. This strategy could be due to the company spending too much of its resources on developing products.
    • One way to get cash flow quickly is through seasonal discounts. Seasonal discounts are price reductions given on out-of-season merchandise.
    • Another option is cash discounts. Cash discounts are reductions on the base price given to customers for paying cash or within some short time period.

Terms

  • cash flow

    The movement of money into or out of a business.

  • seasonal discount

    price reductions given when an order is placed in a slack period


Full Text

Cash flow is the movement of money into or out of a business. The measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation. Some companies will set prices so that they can recover cash flow as quickly as possible. This strategy could be due to the company spending too much of its resources on developing products. This typically requires setting prices very high, which is a disadvantage since competitors can set prices lower and gain a larger market share.

Cash flow is extremely important to a firm. This is how they buy goods, pay employees, fund new investments, and pay dividends. It is necessary to determine the effects of pricing on cash flow to a firm.

One way to get cash flow quickly is through seasonal discounts . Seasonal discounts are price reductions given for out-of-season merchandise. An example would be a discount on snowmobiles during the summer. The intention of such discounts is to spread demand over the year. This can allow for the fuller use of production facilities and improved cash flow throughout the year.

Seasonal Sales Generate Cash Flow

A quick way to generate cash flow is to offer seasonal discounts.

Another option is cash discounts. Cash discounts are reductions on the base price given to customers for paying cash or within some short time period. For example, a company can give a two percent discount on bills paid within 10 days. Another example is a gas station that gives discounts on gas prices to costumers who don't pay with credit cards. The purpose is generally to accelerate the cash flow of the organization.

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