Finance: Financial Management Strategies

Question 1

what is sustainable cash flow management

Answer 1

matching cash flow in with cash flow out

Question 2

what is it known as when more money goes out of a business than comes in or if money is paid out before payments are received

Answer 2

cash shortfalls

Question 3

what can consistent cash shortfalls lead to

Answer 3

overdue fees or potentially business failure

Question 4

how can a business address/combat temporary cash shortfalls

Answer 4

borrowing funds eg. an overdraft

Question 5

what do cash flow statements record

Answer 5

movement of cash receipts and payments over a period of time

Question 6

what does comparing cash flow statements allow

Answer 6

a business to identify cash shortages and surpluses

Question 7

what is distribution of payments

Answer 7

Distributing payments throughout the year so that large expenses do not occur at the same time/cash shortfalls occurring.
This means there is a more equal cash outflow each month rather than it being concentrated in particular months.

Question 8

what are some examples of cash flow management strategies

Answer 8

keeping records
distribution of payments
discounts for early payments
factoring

Question 9

what is discounts for early payment

Answer 9

Offering debtors a discount for early payments.

Question 10

what is factoring

Answer 10

Selling accounts receivable at a discount price to a specialist factoring company.

a last resort

Question 11

what is working capital

Answer 11

funds available for short term financial commitments of a business.

Question 12

what is net working capital

Answer 12

difference between current assets and current liabilities. represents funds necessary for day to day operations of a business/provide cash for short term liquidity.

current assets - current liabilities (liquidity)

Question 13

do lenders look at working capital (liquidity) when looking into borrowing money

Answer 13

yes

Question 14

how must a business control its accounts receivable

Answer 14

ensure timing of accounts receivable allows the business to maintain adequate cahs

Question 15

how does a business ensure accounts receivable are paid

Answer 15

by having a credit policy that includes: checking credit rating, sending statements to customers monthly, following up on accounts, and having policies in place for collecting debts.

Question 15

what is a disadvantage of credit policies

Answer 15

customers may buy from other firms if it is too strict

Question 16

what does having too much or slow inventory lead to

Answer 16

cash shortages

Question 17

should cash be kept at a minimum or maximum

Answer 17

minimum

Question 18

how does a business control its accounts payable

Answer 18

monitor them, and ensure their timing allows the business to maintain adequate cash resources when payment is due

Question 19

how does a business control loans

Answer 19

by investigating alternative sources of funds from other institutions that have lower interest rates

Question 20

how does a business control bank overdrafts

Answer 20

not exceed the amount agreed upon, pay it back on time, but avoid if possible

Question 21

what does leasing out current assets do

Answer 21

Frees up cash that can be used elsewhere so the level of working capital is improved.

Question 22

what is sale and lease back

Answer 22

Selling of an owned asset to a lessor and leasing the asset back through fixed payments for a specified number of years.

Question 23

what is the role of profitability management

Answer 23

maximising profits by maximising revenue and minimising costs

Question 24

what are fixed costs

Answer 24

costs that dont depend on the level of operating activity in a business eg. rent

Question 24

what are cost controls

Answer 24

measures used to minimise costs and avoid unnecessary spending

Question 25

how can you minimise fixed costs

Answer 25

selecting a location that is cost-effective

Question 26

what are variable costs

Answer 26

costs that depend on the level of operating activity in a business- they increase or decrease in proportion to production

Question 27

how can you minimise variable costs

Answer 27

use more affordable materials for a product

Question 28

what are cost centres

Answer 28

departments of a business to which managers can directly attribute costs

Question 29

what are direct costs within cost centres

Answer 29

costs incurred by one particular product or activity
eg. depreciation of a machine used to produce a single product

Question 30

what are indirect costs within cost centres

Answer 30

costs incurred by more than one product or activity within multiple cost centres, departments or regions

eg. administration costs

Question 31

what is expense minimisation

Answer 31

reducing costs across a business where possible

Question 32

what are revenue contorls

Answer 32

measures used to maximise revenue

Question 33

what key marketing objectives are used to measure revenue

Answer 33

sales forecasts
sales mix
pricing policy

Question 34

what standard must sales forecasts be set at

Answer 34

must be set at a level that will generate enough revenue to cover costs and result in profit

Question 35

sales mix

Answer 35

the 4Ps must be constantly reassessed to ensure they reflect the needs and wants of consumers to ensure they continue making purchases

Question 36

what type of pricing policy must the business implement

Answer 36

one that covers costs of making the good, but not so that its overpriced

Question 37

define exchange rates

Answer 37

Each country has their own currency. The foreign exchange rate is the ratio of one currency to another.

Question 38

define interest rates

Answer 38

Australian interest rates are higher than other countries, therefore may borrow money from financial markets overseas.

Question 39

define payment in advance

Answer 39

Allows exporters to receive payment and then arrange for the goods to be sent.

Question 40

define letter of credit

Answer 40

Document that a buyer can request from their bank that guarantees the payment of goods will be transferred to the seller.

Question 41

define clean payment

Answer 41

Exporters ship goods directly to the importer before payment is received.

Question 42

define bills of exchange

Answer 42

Document from exporter demanding payment from importer at a specified time.

Question 43

define hedging

Answer 43

Process of minimising risk of currency fluctuations.

Question 44

define derivatives

Answer 44

Derivatives are financial contracts, set between two or more parties, that derive their value from an underlying asset, group of assets, or benchmark. A derivative can trade on an exchange or over-the-counter. Prices for derivatives derive from fluctuations in the underlying asset.