Finance #5 Flashcards
working capital management
determining the best mix of current assets and current liabilities needed to achieve business objectives
control of current assets
cash, accounts receivable, inventories
cash
ensures businesses can pay their debts, repay loans and pay accounts in the short-term because of the easy access
accounts receivable
businesses must monitor them and ensure that their timing allows a business to maintain adequate cash resources, the better the debtors pay the better the firms cash position
- ## credit policies are used to ensure payments are done by a specific time
credit policies
ensures payments are done by a specific time
tight policies may push business elsewhere and to loose of a policy will hurt the cash flow of the business and the ability to get liquid cash to pay off short-term debt.
inventories
make up a significant amount of current assets, it is a cost to the business if it remains unsold, and the holding of too much stock means unnecessary expenses. there needs to be a high rate of inventory turnover for the business means they are more sufficient at generating cash
control of current liabilities
accounts payable, loans, overdrafts
accounts payable
money owed by the business to other businesses from whom it has purchased goods and services,
- taking advantage of discounts
- consignment financing, goods are supplied for a particular period of time and payment is generally not required until goods are sold
working capital strategies
leasing, sale and lease back
leasing
payment of money for the use of equipment that spreads cash outflows over several years, allows cheaper prices compared to outright expenses, is considered operating expenses and therefore tax deductible, allows flexibility, reduces the risk of unpredictable costs, helps cash flow forecasting and budgeting as the payments are fixed for a period of time.
sale and lease back
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
- advantage is that it helps improve liquidity since it enables the business to receive a large cash injection from the assets sale,
business still benefits from the use of the asset
foreign exchange rate
ratio of one currency to another
effects of currency fluctuations
currency appreciations raises value of the australian dollar as a foreign currency, making exports more expensive on international markets but import prices cheaper
currency depreciation makes exports cheaper and import prices more expensive
this affects profitability depending on the business situation
interest rates
borrowing money changes with the interest rates of the country, with exchange rate movements the interest rates differ to the country that is business is being conducted in, therefore affecting profitability
methods of international payment
payment in advance, letter of credit, clean payment, bills of exchange,
payment in advance
exporter receives payment and then arranges for the goods to be sent, leaving the exporter with virtually no risk and is used when there is a high trust or if the buyer’s creditworthiness is uncertain
letter of credit
a document that a buyer can request from their bank that guarantees the payment of goods will be transferred to the seller, issued by the importers bank to the exporter promising pay once a certain amount of conditions have been met,
only payment in advance offers less risk and is therefore highly popular with exporters, cannot be withdrawn, and if buyer cannot make purchase, the bank makes the purchase
clean payment
exporter ships the goods directly to the importer before payment is received, importer doesnt send payment until after they receive the goods, invoice requesting payment at a certain time called the credit term, this is one of the riskiest for exporters
bills of exchange
document (bill) against payment, document (bill) against acceptance
bill of exchange is a document drawn up by the exporter demanding payment from the importer at a specified time
document (bill) against payment
importer collects the goods only after paying for them,
document (bill) against acceptance
the importer may collect the goods before paying for them, exposes exporter to greater risk than documents against payment, there is a risk the importer may delay payment or not pay at all
hedging
the process of minimising the risk of currency fluctuations
spot exchange rate
value of one currency in another currency on a particular day
natural hedging
eliminating or minimising the risk of foreign exchange exposure provided by the business itself
natural hedging
eliminating or minimising the risk of foreign exchange exposure provided by the business itself
derivatives
simple, financial instruments that may be used to lessen the exporting risks associated with currency fluctuations
forward exchange contract
contract to exchange one currency for another at an agreed exchange rate on a future date, bank guarantees the exporter a fixed rate, dodging the risk of more expensive or the benefits of cheaper costs
options contract
gives the buyer the right, not the obligation, to buy or sell foreign currency at some time in the future, protecting them from unfavourable exchange rate fluctuations
leverage
total liabilities / total liabilities + total equity
D/D+E = Debt/ Debt+Equity
the proportion of debt from the total sources of finance, discovers gearing used to measure solvency/paying off debts in the long term
