Finance Strategies

Question 1

Why are cash flow statements a cash flow management strategy?

Answer 1

They can be used to predict future cash flow so the business can plan ahead to prevent ever being short of cash

Question 2

Why is distribution of payments a cash flow management strategy?

Answer 2

If a business needs to make a big payment or many payments close together, it might not have enough cash on hand.

Instead, it can spread these payments out across the year so that it always has enough cash to make payments when they are due.

Question 3

Why are discounts for early payment a cash flow management strategy?

Answer 3

Offering discounts to customers who pay early can help the business receive cash earlier, so that it is never short of cash

Question 4

Why is factoring a cash flow management strategy?

Answer 4

Rather than waiting until a customer pays the accounts receivable, the business can sell the debt (for a discount) so that they receive most of the money sooner instead.

Question 5

What is working capital?

Answer 5

The difference between current assets and current liabilities

(Working capital = Current assets - Current liabilities)

Question 6

How does a business control its cash?

Answer 6

• Keep reserves to cover any unexpected costs
• Keep secure to prevent theft

Question 7

How does a business control its accounts receivable?

Answer 7

• Have a shorter time period for customers to pay
• Give customers reminders to pay
• Have late fees and a debt collection process if they don’t pay
• Use factoring

Question 8

How does a business control its inventory?

Answer 8

Use JIT instead of holding stock to avoid unnecessary costs and risk of damage/theft

Question 9

How does a business control its payables?

Answer 9

• Delay payment until the due date
• Take advantage of discounts for paying bills early

Question 10

How does a business control its loans?

Answer 10

Research options for lower interest rates from other banks

Question 11

How does a business control its overdrafts?

Answer 11

Arrange limit and fees with the bank in advance

Question 12

Why does leasing help improve working capital?

Answer 12

Leasing (renting) avoids the need for big expenses on property and equipment, so businesses keep more cash on hand

Question 13

Why does sale and lease back help improve working capital?

Answer 13

Selling an asset and leasing it back will mean the business gets a large amount of cash immediately, helping to increase current assets and working capital

Question 14

What is the case study for distributing payments?

Answer 14

Woolworths - they made suppliers offer 60 day payment periods

Question 15

What is the case study for discounts for early payment?

Answer 15

GIO - they offer discounts on insurance to customers who pay up-front for the year instead of monthly

Question 16

What is the case study for working capital management?

Answer 16

Qantas - they did sale and leaseback of their Melbourne terminal

Question 17

What are the cash flow management strategies?

Answer 17

• Cash flow statements
• Distribution of payments
• Discounts for early payment
• Factoring

Question 18

What are the working capital management strategies?

Answer 18

Control of current assets: cash, receivables, inventories

Control of current liabilities: payables, loans, overdrafts

Leasing, and sale and leaseback

Question 19

What are the profitability management strategies?

Answer 19

Cost controls - fixed and variable costs, cost centres, expense minimisation

Revenue controls - marketing objectives

Question 20

What are fixed costs (with examples)?

Answer 20

Costs that do not change with the volume produced (e.g. factory, permanent employees)

Question 21

What are variable costs (with examples)?

Answer 21

Costs that change when you produce more (e.g. materials, casual employees)

Question 22

What are variable costs (with examples)?

Answer 22

Costs that change when you produce more (e.g. materials, casual employees)

Question 23

How can a business manage its fixed and variable costs?

Answer 23

1) Try to find cheaper options for any fixed costs (e.g. rent) or variable costs (e.g. suppliers)

2) Try to increase production to spread fixed costs over more products (i.e. achieve economies of scale)

Question 24

What are cost centres and how do they help?

Answer 24

Allocating a certain amount of money to different areas in the business (e.g. the marketing team, the IT department etc.)

This creates a maximum amount each of those areas could spend in a year, keeping costs down to increase profit

Question 25

What is expense minimisation and how can you do it?

Answer 25

Finding ways to reduce unnecessary spending.

This can be done by:
- Requiring staff to get approval for any spending
- Having guidelines on what and when staff can make purchases
- Having reviews of what money is being spent on

Question 26

What is the case study for expense minimsation?

Answer 26

Qantas - outsourced baggage handlers

Question 27

What is the case study for fixed and variable costs?

Answer 27

Qantas in the pandemic

Reduced fixed costs by making 6000 staff redundant

Reduced variable costs by trialling reduced cabin crews on each flight

Question 28

How can a business do revenue controls?

Answer 28

Set marketing objectives (e.g. increase market share, increase the product mix) for the marketing team

Question 29

What is the case study for revenue controls?

Answer 29

H&M - marketing objectives

Question 30

How would an appreciation of the exchange rate affect Australian businesses?

Answer 30

• Can import inputs for cheaper
• Foreigners are less likely to buy our exports
• If a business has borrowed from overseas, it will find it easier to repay it

Question 31

How would a depreciation of the exchange rate affect Australian businesses?

Answer 31

• Imported inputs will be more expensive
• Foreigners are more likely to buy our exports
• If a business has borrowed from overseas, it will find it harder to repay it

Question 32

Why are interest rates a global financial strategy?

Answer 32

If interest rates in Australia are too high, businesses can borrow from another country where interest rates are lower

Question 33

What are TWO risks with borrowing from another country where interest rates are cheaper?

Answer 33

1) The interest rate in that country might increase

2) The Australian dollar might depreciate, making it harder to repay the loan

Question 34

How can a business manage the risk of exchange rate changes?

Answer 34

Use hedging and derivatives

Question 35

What is hedging?

Answer 35

Methods used to reduce the risk of future price changes

Question 36

What are 4 methods for hedging against exchange rate risk?

Answer 36

1) Buy inputs and sell outputs in the same currency (so never have to convert currency)

2) Use excess foreign currency to buy equipment, rather than converting it back to Australian dollars

3) Market the product so effectively that foreigners will still buy it even if the Australian dollar appreciates

4) Buy derivatives contracts

Question 37

What is a derivative?

Answer 37

A financial contract to reduce the risk of future price changes

Question 38

What are 2 examples of derivative contracts?

Answer 38

1) Forward exchange contract: a contract that locks in a price for a future date

2) Options contract: a contract that gives the buyer the right to buy at a certain price at a future date (but they have the option to choose not to)

Question 39

What is the case study for hedging?

Answer 39

Qantas - borrows in US dollars and uses its US revenue to repay it, rather than converting it back to AU dollars

Question 40

What is the case study for derivatives?

Answer 40

Qantas - uses forward exchange and options contracts to lock in future exchange rates and the price of 95% of its fuel

Question 41

What are the methods of international payment?

Answer 41

• Payment in advance
• Clean payment
• Letter of credit
• Bill of exchange

Question 42

What is payment in advance and who is at risk?

Answer 42

When the importer pays the exporter before the product is sent.

The importer is at risk.

Question 43

What is clean payment and who is at risk?

Answer 43

When the importer pays the exporter after the product is sent.

The exporter is at risk.

Question 44

What is a letter of credit and who is at risk?

Answer 44

When the bank guarantees that payment will be made once the product is delivered.

The bank is at risk (but charge a fee to the importer)

Question 45

What is a bill of exchange and who is at risk?

Answer 45

When the exporter ships the products and then sends a ‘bill of exchange’ to the importer’s bank. The importer must then make payment at their bank in order to get the bill that they can then show at the port to access the product.

Very little risk here, except that if the importer doesn’t pay the exporter will have to transport their products back again