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2. strategies of financial management Flashcards

1
Q

How are cash flow statements used for cash flow management?

A

Cash flow statements outline money coming in and out of business.

They help ensure outflow is not greater than inflows and allow for the development of strategies to respond to upcoming outflows.

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2
Q

What do cash flow management strategies ensure?

A

They ensure that there is a sufficient amount of liquidity (cash) in the business.

Strategies include distribution of payments, discounts for early payments, and factoring.

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3
Q

what is the distribution of payments, cash flow management strategy?

A

involves spreading out payments throughout month/year to avoid large expenses at same time and cash shortfalls.
- Distribute debt to make it more manageable
- Ensure equal cash flow each month

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4
Q

what are the advantages of the distribution of payments, cash flow management strategy?

A
  • Ease financial pressure during low revenue periods
  • Help with budgeting and planning
    Improve cash flow
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5
Q

what are the disadvantages of the distribution of payments, cash flow management strategy?

A
  • May gain more interest for delayed payments
  • Can lead to debt if not carefully managed
  • Risk of missed payments
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6
Q

how does distribution of payments, cash flow management strategy link to objectives of strategic financial management?

A

liquidity - ensures it has enough cash on hand
solvency - avoid situations where business cant meet LT financial obligations
efficiency - improves how cash is used, reduces idle funds.

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7
Q

what is discounts for early payment cash flow management strategy?

A

Involves offering discounts to debtors that owe the business money to incentivise quick payments of accounts recievable.
- most effective when targeted at those debtors who owe the largest amounts
- Beneficial for debtors (receive discount, save money, improve cash flow) and business (improve cash flow and efficiency)

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8
Q

what are the advantages of discounts for early payment, cash flow management strategy?

A
  • Reduced risk of late payments
  • Improve customer loyalty and relationships, discount = incentive
  • Improves working capital + extra liquidity
  • Reduced risk of non-payment and bad debt
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9
Q

what are the disadvantages of discounts for early payment, cash flow management strategy?

A
  • Decrease profit margins
  • Impact cash flow forecasting
  • No guarantee customers will keep paying quickly.
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10
Q

how does discounts for early payment, cash flow management strategy link to objectives of strategic financial management?

A

liquidity - encourages faster cash inflow, access to cash sooner
efficiency - improves cash conversion cycle
solvency - business is less like to rely on debt with improved cash flow

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11
Q

what is the factoring, cash flow management strategy?

A

Selling accounts recievable to factor company at a discounted price
- Indication of poor financial management - use when in a poor financial position

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12
Q

what are the advantages of factoring, cash flow management strategy?

A
  • Immediate cash injection (within 24 hours)
  • Not a loan - no debt or interest
  • quick and easy to arrange
  • Avoid hassle of collecting debts
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13
Q

what are the disadvantages of factoring, cash flow management strategy?

A
  • Reduced profit margin on invoice they sell
  • Can be more expensive
  • Can damage business relationship with customers if company uses aggressive collection methods
  • Could indicate to customers that business has cash flow problems
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14
Q

how does factoring, cash flow management strategy link to objectives of strategic financial management?

A

liquidity - access to immeadiate cash
efficiency - reduces the time and resources spent on chasing unpaid invoices.
solvency - improving short term cash flow = reduced risk of insolvency

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15
Q

Why is it important for a business to have short term liquidity?

A

To take advantage of profit opportunities when they arise, meet short-term financial obligations, pay creditors on time to claim discounts, pay tax, meet payments on loans and overdrafts, and ensure creditors have guarantees that their accounts will be paid.

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16
Q

Define working capital.

A

Working capital is a term used in businesses to describe funds available for the short-term financial commitments of a business.

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17
Q

Define net working capital.

A

Net working capital is the difference between current assets and current liabilities. It represents funds needed for day-to-day operations to produce profits and provide cash for short-term liquidity.

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18
Q

What is the working capital cycle?

A

The length of time it takes a business to convert net assets and current liabilities into cash.

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19
Q

What happens if a business has insufficient working capital?

A

It can lead to cash shortages, liquidity problems, and may force the business to increase debt, find new sources of financing, or sell current assets.

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20
Q

What happens if a business has excess working capital?

A

Excess working capital means that assets are earning less than the cost to finance them.

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21
Q

What is working capital management?

A

It involves determining the best mix of current assets and current liabilities needed to achieve the objectives of the business, balancing the use of funds for profit and holding funds to cover payments.

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22
Q

What does control of current assets require?

A
  • Management to select optimal amount of each current asset held
  • Raising finance required to fund assets
  • Assessing costs and benefits of holding too much or too little of each assets
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23
Q

why must cash as a current asset be controlled?

A
  • Ensures business can pay debts, repay loans and pay short term accounts = long term survival of business
  • Enable business to take advantage of investment opportunities
  • Plan timing of cash receipts, cash payments and asset purchases to avoid cash shortages or excess cash
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24
Q

why must accounts receivable as a current asset be controlled?

A
  • Refers to outstanding inovices or payments that buisiness has, money owned by customers.
  • Collecting accounts recievables to ensure cash flow and management of working capital
  • Quicker the debtors pay = better cash position
  • Better efficiency
25
why must inventories as a current asset be controlled?
- Could hold large inventories - ensure they dont run out - can be expensive to store - Insufficent invenoty of quick selling items - may lead to loss of customers and lost sales - Rate of inventory stock turnover
26
Why must a business control their current liabilities as a working capital management strategy?
So they are able to pay creditors and convert current assets into cash + minimising costs.
27
why must accounts payable as a current liabilities be controlled?
- Monitor payables and ensure timing allowed business to maintain adequate cash resources - Can hold back until final due date due to period of interest-free trade credit offers or take advantages of discounts for early repayments Control of accounts payable involves periodic reviews of suppliers and the credit facilities they provide
28
why must loans as a current liabilities be controlled?
- Short term loans can be expensive so use should be minimised - Involves investigating alternative sources of funds from different banks and financial institutions - Position relationships with financial institutions so most appropriate short term loan is used.
29
why must overdraft as a current liabilities be controlled?
- Bank charges can vary depending on type of overdraft - must be monitored - Business should have policy for using and managing overdrafts - Monitor budget often to ensure cash supplies are controlled
30
What is leasing as a working capital management strategy?
the payment of money for the use of equipment that is owned by another party
31
How can leasing be advantageous to working capital of a business?
- Cash outflows are distributed over long period of time - not one off large capital outlay - Can utilise high quality assets that may have been unaffordable otherwise - Operating expense = tax deductible - reduces the risk of unpredictable costs with the repairs and maintenance - Lease payments help with cash flow forecasting and budgeting - because fixed and steady payments
32
What is a case study for leasing as a working capital management strategy?
McDonalds leases almost all their stores, does not purchase many properties. Reduces the large capital outlay of purchasing a building and allows them to control their working capital to manage operational costs such as staff wages, purchasing invetory and upgrading kitchen equipment.
33
What is sale and lease-back as a working capital management strategy?
the process of selling an owned asset to a lessor and then leasing the asset back through fixed payments for a specified period of time
34
How can sale and lease-back be advantageous to working capital of a business?
- Helps improve liquidity - enables the business to receive a large cash injection from the sale of the asset, which can then be used as working capital if the business is experiencing a cash shortfall. - But business still benefits from use of asset.
35
What is a case study for sale and lease-back?
In 2020, Woolworths raised over $59 million from the sale and lease-back of two Woolworths supermarket- anchored shopping centres. By selling these supermarkets and leasing them back from the new owner, Woolworths received a large amount of cash that could be used as working capital. They used the working capital for expenses such as investing in COVID-19 safety measures, paying supples and covering wages.
36
How is the value of each country's currency established?
Through foreign exchange dealers buying and selling currencies. ## Footnote The value is called the exchange rate.
37
What is the foreign exchange rate?
The ratio of one currency to another. ## Footnote It tells how much a unit of one currency is worth in terms of another.
38
Why do exchange rates fluctuate?
Due to variations in demand and supply.
39
What is the impact of an appreciation of the AU dollar?
It raises the value of the Australian dollar in terms of foreign currencies. ## Footnote Each unit of foreign currency buys less in AU, making exports more expensive and reducing international competitiveness.
40
What is the impact of a depreciation of the AU dollar?
It lowers the price of Australian dollars in terms of foreign currencies. ## Footnote Each unit of foreign currency buys more AU dollars, making AUS exports cheaper and improving international competitiveness.
41
How does currency fluctuations impact business success?
They impact the profitability of a global business and affect the ability to meet financial obligations.
42
Where can global businesses borrow money from?
Australian financial institutions or financial markets overseas. ## Footnote Help to relocate offshore, expand domestically - must raise finance.
43
Why are businesses tempted to borrow overseas?
Australian interest rates are usually higher, leading businesses to seek lower interest rates overseas.
44
What is the risk associated with borrowing money from overseas sources?
Exchange rate movements can eliminate the advantage of borrowing overseas.
45
How can borrowing money overseas impact profitability?
Adverse exchange rate movements can impact profitability if money is borrowed overseas.
46
what are the different methods of payment?
* payments in advance * letter of credit * clean payment * bills of exchange
47
what is payments in advance as a method of international payment, and who is it risky for?
- Allows exporter to recieve payment and then arrange for the goods to be sent. - Used it other party is a subsidary or when credit worthiness of buyer is uncertain risk: none for exporter, high for buyer
48
what is letter of credit as a method of international payment, and who is it risky for?
Documented requested by buyer from their bank to gurantee the payment of goods will be transferred to seller. risk for bank
49
what is clean payment as a method of international payment, and who is it risky for?
Exporter ships the goods directly to the importer before payment is recieved. risk: high for exporter, good for importer
50
what is bills of exchange as a method of international payment, and who is it risky for?
document drawn up by epxorter demanding payment from the importer at a specified time. types: 1. document against payment 2. document against acceptance risk: advantageous for exporter, can control goods.
51
what is hedging and its goal?
Hedging is often used to avoid/reduce risk of exchange rate fluctuations without using a spot exchange rate. GOAL: protect profit margins by reducing exposure to exchange rate fluctuations and preparing for them.
52
what is spot exchange and the spot exchange rate?
Spot exchange - when two parties agree to exchange currency and financialise their deal immeadiatley Spot exchange rate - value of currency on a particular day
53
How does hedging work?
1. Import goods 2. Set pricing for the year in advance 3. Calculating exchange rate fluctuations over year + impact on profits 4. Protect profit margins by hedging portion of foreign costs 5. Lock in an exchange rate to improve cash flow and confidence
54
What are some natural hedging methods (and what is it)?
- DEF: does not involve locking exchange rates - more avoidant - Establish offshore subsidaries - so all financial transactions happen in the other country - Arrange for import payments and export receipts to be in one currency to avoid loss from exchanging currency
55
what are derivatives
Derivatives are a type of hedging - help to reduce risk for the business when undertaking financial transactions and investments. - Agreements are made BEFORE actions take place (derivative - derive - derive from prior agreement) - Creates stability and enables business to financially plan
56
What are the three main derivatives available for exporters?
1. Forward exchange contract 2. Options contract 3. Swap contract
57
what is a forward exchange contract derivative?
A contract to exchange one currency for another currency at an agreed exchange rate on a future date.
58
what is an option contracts derivative?
Gives the buyer the right, but not the obligation to buy or sell at an agreed exchange rate or not.
59
what is a swap contracts derivative?
An agreement to exhcnage currency in the spot market with an agreement ot reverse the transaction in the future.

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