Dirección Financiera II

Question 1

Importance of Cash Flow Management

Answer 1

1. Liquidity
2. Forecast (Budgeting / WC)
3. Dividends (Balance between dividends and reinvesting profits) / Investment
4. Identify trends
5. Make decisions

Question 2

Challenges of Cash Flow Management

Answer 2

1. Market Volatility (Cash inflow or outflow can be unpredictable)
2. Delayed Receivables
3. Growth vs Liquidity (Balancing investment in growth, with mantaining cash reserves)
4. Seasonal fluctuations
5. Have to compare

Question 3

Consequences of Poor Cash Flow Management

Answer 3

1. Higher Borrowing Costs.
2. Increased Risk of Insolvency or Bankruptcy.
3. Damage to Credit Ratings and Reputation (trust issues)
4. Missed Investment Opportunities

Question 4

Strategies for Improving Cash Flow

Answer 4

1. Accelerate Receivables (ex: Offer early payment discounts)
2. Negotiate Payment Terms (Extend payment Periods with suppliers to keep cash longer / Bulk purchase discounts)
3. Reduce Expenditures and optimize costs (Cut unnecessary spending)
4. Implement Inventory Controls (Just in Time (Inventory is ordered only as needed) and Inventory Audits (Check regularly to avoid overstocking))

Question 5

Free Cash Flow

Answer 5

• Profitability Doesn’t Always Mean Positive FCF:

A company can be profitable on paper but still have negative FCF if it spends a lot on capital investments.

• Seasonal Variations Can Skew FCF:

Some industries, like retail, might have negative FCF during slow seasons but bounce back during peak times.

• High Capital Spending Can Temporarily Lower FCF:

Just because FCF drops doesn’t always mean the company is in trouble. Sometimes it’s due to planned, high-return investments.

Question 6

Why do we use Financial Ratios?:

Answer 6

Profitability Insights: Measure how well a company is making money.

Liquidity Assessment: See if the company can pay its short-term bills.

Solvency Evaluation: Check if the company can meet its long-term obligations.

Strategic Decision Making: Help managers make smarter financial choices

Trend Identification: Spot patterns over time (like improvements or problems).

Benchmarking Standards: Compare the company to others in the industry.

Question 7

Limitations of Financial Ratios

Answer 7

1. Historical Data Limitations (Ratios may not reflect current conditions)
2. Accounting Methods Impact (Different methods affect comparability)
3. Distortion by Events (Seasonal or one-time events can skew ratios)
4. Qualitative Factors (Ratios should be complemented by qualitative analysis)

Question 8

Uses of Financial Ratios

Answer 8

Compare ratios over multiple periods to spot trends (This one)

Benchmark against industry peers for context (This one)

Understand the company’s accounting policies

Look for consistency and alignment with other data points

Question 9

Income statement Limitations

Answer 9

Does not show cash flow (it doesn’t always mean actual cash available)

Unusual events can skew results

Should be used alongside other statements

Question 10

Income Statement Uses

Answer 10

Manager Uses:

• Evaluate performance
• Spot areas where costs can be cut
• Make growth/cost saving decisions

Investors Uses:
- Evaluate profitability
- Compare with other companies from same industry
- Make investment decisions
- Evaluate Earnings per Share and Return on Investment

Question 11

Profit and Loss vs Cash Flow

Question 12

Risk Management

Answer 12

Types of Risk (Levels of Uncertainty)
Uncertainty Level 1 → TREND
Low Uncertainty
Quantitative Approach (Can calculate and predict outcomes. Situations are fairly predictable)
Clear trends
Ex: If the demand for electric vehicles (EVs) is consistently increasing, a car manufacturer can confidently invest in EV technology

Uncertainty Level 2 → SCENARIO
Alternative Futures (Different outcomes can occur. It’s hard to predict which one will happen)
Scenario Based (You have to plan for multiple scenarios)
You can partially predict outcomes, but not completely
Example: A company considering expansion into a new country might face different scenarios related to political stability, economic growth, or consumer behavior

Uncertainty Level 3 → DIRECTION
There is a wide range of possible outcomes, but no clear path (Range of Futures)
Qualitative Approach (It’s more about understanding possibilities than calculating them)
High uncertainty (Can’t accurately predict which direction things will go)
Example: Entering a market with rapidly changing technology, like artificial intelligence (AI) or genetic engineering.

Uncertainty Level 4 → PROPHECY
The future is completely unpredictable
Total Ambiguity (No idea what will happen)
Zero Predictability
Example: Predicting the impact of a revolutionary new technology that doesn’t yet exist.

Question 13

Strategic Postures (How to respond to uncertainty)

Answer 13

Shape the Future (Strategic Posture 1)

• Take the lead and influence how the future will look

Adapt to the Future (Strategic Posture 2)

• Be flexible and responsive to changes

Reserve the Right to Play (Strategic Posture 3)

• Wait and see, but make small, strategic investments to stay relevant

Question 14

Strategic Moves

Answer 14

• No Regrets Moves:

Actions that are beneficial no matter what happens

Risk Level: Low or zero

Example: Leasing a car instead of buying it — you get to use it without owning it, minimizing financial commitment

• Options:

Investments that keep your options open without fully committing.

Risk Level: Moderate risk with great opportunity

Example: In the oil industry, drilling multiple wells without knowing if they all contain oil. Even if only a few are successful, they can cover the entire investment

• Big Bets:

High-risk, high-reward moves that can either pay off significantly or fail spectacularly

Risk Level: Great risk but great opportunity.

Example: Investing everything in a revolutionary product that could dominate the market, or flop