3.5.4 Making Financial Decisions: Improving Cash Flow and Profits. Flashcards
What are the methods of improving cash flow?
Bank overdraft.
Debt Factoring.
Sales and Leaseback.
Leasing of non current assets.
How does a bank overdraft improve cash flow?
Allows use of an overdraft, therefore a negative balance is held.
What is working capital?
Day-to-day finance used in a business consisting of current assets - current liabilities.
Why must a firm manage its working capital?
To stay solvent.
In terms of cash management, what are the two options a business can arrange to get cash?
Agree an overdraft.
Set aside a contingency fund.
(Cash management) When would we need to manage receivables?
When deciding whether to offer credit to a customer.
(Cash management) How do we manage receivables?
Obtain a credit rating.
Controlling product quality - less likely to delay payment.
Benefits vs drawbacks of the credit offer.
Managing credit control.
How do we manage inventory?
Can keep high levels of inventory for buffer stock or can operate in a JIT system.
How do we manage payables?
Usually expect credit terms when purchasing from suppliers. However, longer term credits can delay payments, therefore keeping more cash.
How else can a business improve its cash flow?
Diversifying product portfolio.
Improved planning, monitoring and control.
Contingency fund to help with unexpected loss of income.
What are the difficulties of improving cash flow?
Seasonal demand.
Overtrading.
Over investment in long term assets.
Unforeseen changes.
Losses or low profits.
How how does overtrading make improving cash flow difficult?
Firms expand rapidly without organising long term funds, therefore putting a strain on their working capital.
How does over investment in long term assets make improving cash flow difficult?
May invest in long term assets to grow, but leave themselves with inadequate cash for day to day payments.
What are the drawbacks of a bank overdraft?
Interest payments drain businesses cash.
What are the drawbacks of debt factoring?
Sum paid will be less than sum owed to the business.
What are the drawbacks of sales of assets?
Assets such as buildings and machinery are more difficult to quickly sell off.
What are the drawbacks of sale and leasback?
Assuming the business buying the asset wishes to make profits from it, selling it will pay more in rent than it receives from it sales.
What are the drawbacks of leasing of non current assets?
Selling them will pay more in rent than it receives in sales.
What are the drawbacks of cash management?
Keeping a large contingency reduces risk but limits the level of investment undertaken by a business.
What are the drawbacks of chasing receivables for prompt payment?
May lead to a loss of goodwill.
What are the drawbacks of reducing inventory levels?
Reduces sales and profit because the products may not be available to prospective customers.
What are the drawbacks to delaying payments to payables.
Lead to a loss of goodwill.
What are the most basic methods of increasing profit?
Changing price.
Decreasing costs.
Increasing sales volume.
How will changing the price increase profit?
Widen the profit margin - generate more profit.
How can decreasing costs improve profit?
Cutting direct costs will increase profit margins.
What are other methods of improving profitability/profit?
Investment in fixed assets e.g. new equipment.
Product development and innovation.
Marketing.
Human resource strategies.
What are internal difficulties changing price (decreasing costs) to improve profit?
Reducing wages.
Cutting raw material costs - lower quality.
Cutting marketing budget - lower sales due to cut promotion.
How can increasing sales volume to decrease costs improve profitability/profit be difficult?
Requires effective marketing, good customer service and high quality production along with a large amount of coordination from the business.
What are external factors influencing profits/profitability?
Competition.
Market conditions.
Consumers incomes.
Interest rates.
Demographic features.
Environmental issues.
