Finance: Financial Management Strategies Flashcards
what is sustainable cash flow management
matching cash flow in with cash flow out
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
cash shortfalls
what can consistent cash shortfalls lead to
overdue fees or potentially business failure
how can a business address/combat temporary cash shortfalls
borrowing funds eg. an overdraft
what do cash flow statements record
movement of cash receipts and payments over a period of time
what does comparing cash flow statements allow
a business to identify cash shortages and surpluses
what is distribution of payments
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.
what are some examples of cash flow management strategies
keeping records
distribution of payments
discounts for early payments
factoring
what is discounts for early payment
Offering debtors a discount for early payments.
what is factoring
Selling accounts receivable at a discount price to a specialist factoring company.
a last resort
what is working capital
funds available for short term financial commitments of a business.
what is net working capital
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)
do lenders look at working capital (liquidity) when looking into borrowing money
yes
how must a business control its accounts receivable
ensure timing of accounts receivable allows the business to maintain adequate cahs
how does a business ensure accounts receivable are paid
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.
what is a disadvantage of credit policies
customers may buy from other firms if it is too strict
what does having too much or slow inventory lead to
cash shortages
should cash be kept at a minimum or maximum
minimum
how does a business control its accounts payable
monitor them, and ensure their timing allows the business to maintain adequate cash resources when payment is due
how does a business control loans
by investigating alternative sources of funds from other institutions that have lower interest rates
how does a business control bank overdrafts
not exceed the amount agreed upon, pay it back on time, but avoid if possible
what does leasing out current assets do
Frees up cash that can be used elsewhere so the level of working capital is improved.
what is sale and lease back
Selling of an owned asset to a lessor and leasing the asset back through fixed payments for a specified number of years.
what is the role of profitability management
maximising profits by maximising revenue and minimising costs
what are fixed costs
costs that dont depend on the level of operating activity in a business eg. rent
what are cost controls
measures used to minimise costs and avoid unnecessary spending
how can you minimise fixed costs
selecting a location that is cost-effective
what are variable costs
costs that depend on the level of operating activity in a business- they increase or decrease in proportion to production
how can you minimise variable costs
use more affordable materials for a product
what are cost centres
departments of a business to which managers can directly attribute costs
what are direct costs within cost centres
costs incurred by one particular product or activity
eg. depreciation of a machine used to produce a single product
what are indirect costs within cost centres
costs incurred by more than one product or activity within multiple cost centres, departments or regions
eg. administration costs
what is expense minimisation
reducing costs across a business where possible
what are revenue contorls
measures used to maximise revenue
what key marketing objectives are used to measure revenue
sales forecasts
sales mix
pricing policy
what standard must sales forecasts be set at
must be set at a level that will generate enough revenue to cover costs and result in profit
sales mix
the 4Ps must be constantly reassessed to ensure they reflect the needs and wants of consumers to ensure they continue making purchases
what type of pricing policy must the business implement
one that covers costs of making the good, but not so that its overpriced
define exchange rates
Each country has their own currency. The foreign exchange rate is the ratio of one currency to another.
define interest rates
Australian interest rates are higher than other countries, therefore may borrow money from financial markets overseas.
define payment in advance
Allows exporters to receive payment and then arrange for the goods to be sent.
define letter of credit
Document that a buyer can request from their bank that guarantees the payment of goods will be transferred to the seller.
define clean payment
Exporters ship goods directly to the importer before payment is received.
define bills of exchange
Document from exporter demanding payment from importer at a specified time.
define hedging
Process of minimising risk of currency fluctuations.
define derivatives
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.
