Finance strategies Flashcards
Working Capital Management
Working capital
the amount of cash the business has to meet their commitments (ST). Working capital as an amount in current assets-current liabilities
Working Capital Management
aspects of WCM
Controlling of:
1. current assets: cash, stock, acc/rec
2. current liabilities: acc/pay, loans, overdraft
Working Capital Management
control of current assets: cash
Problems:
* too much
* not generating income if not used
* timing of having/not having
* too little
Solutions:
* having benchmark cash amount enough to meet ST debt commitments by retaining more profit and moving it from OE
Working Capital Management
Control of current assets: stock
Problems:
* has to be turned over to generate cash, slow
* holding too much-storage, insurance, shrinkage
* obscilescence, perishable
* too little, missed sales opportunity
Solutions:
* Inventory management
* FIFO
* JIT & JIC
* discounts
* stock takes; counting, checking
* sales; reduce stock to optimal levels
Working Capital Management
control of current assets: accounts recievable
Problems:
* not paid on time, too slow to pay
* poor credit policies
* poor records/management of accounts
Solutions:
* discounts for early payments
* promote cash payements
* credit checks; look at payment history to assess risk
* good/proactive credit policy; deposit, penalties for being late, limit period and values that can be put on account
* factoring bad accounts (last resort)
Working Capital Management
Control of current liabilities: accounts payable
Problems:
* stock withheld until payment
* bulk and other discounts revoked
* poor supplier relationships
Solutions:
* hold back payments until due dte
* use early payment discounts
* pay cash upfront for better deal
Working Capital Management
Control of current liabilities: loans
Problems:
* late/default payments, additional charges
* admin charges and fees
* late and risk premiums
* inappropriate use of debt finance
Solutions:
* compare interest rates with other suppliers and refinance
* find alternative methods of funding w/o borrowing
* ensure current loan structure matches usage
* capital budgeting; ST return compared to loan cost
Working Capital Management
Control of current liabilities: overdraft
Problems:
* late/default payment additional charges
* admin fees and charges
* late and risk premiums
Solutions:
* monitor overdraft accounts
* deposit surplus cash to minimise interest cost
* consider other types of ST borrowing
* invest surplus cash into ST securities with higher interest rates to increase capital
Working Capital Management
leasing
Cost:
* additional expense
* diminishes net worth, less assets accumulated
* may reduce borrowing capacity
Benefit:
* boosts working capital
* doesn’t feature on balance sheet as asset or liability, it is an expense
* avoids large outlay of capital
* avoids effects of depreciation
* tax reductions
* assets upgraded more often
* maintenance included in fees
Profitability Management
Profitability
It is made up of both considering minimising cost and maximising revenue. There needs to be acknowledgement of both in questions unless specified. It is made up of:
* Cost Controls
* Revenue Controls
Profitability Management
Aspects of Cost Controls
- fixed and variable costs
- cost centres
- expense minimisations
Profitability Management- cost control
Fixed cost
Fixed costs remain consistent regardless of level of production, if you can put a contract on it then it is usually fixed eg. rent
Ways to reduce:
* leasing for a period where fixed
* contracted labour
* supply chain can be contracted to supply at fixed cost; change supplier/premises, sell and lease back
Achieved through contracts, agreement, negotation.
Profitability Management- cost control
variable cost
Variable costs change with the level of production eg. electricity. They can be lowered by:
* casualising labour force: hire casually for a short amount of time in periods of demand
* replace PT/FT workers when they resign with casual staff
You cannot recommend lowering cost if it comes at detriment to output.
Profitability Management- cost control
Cost centres
Cost centres are KBFs that generate expenditure and no direct profit (operations & HR).
They have both direct and indirect costs; direct are those that can be attributed to a particular product, indirect are those that can be attributed to more than one product.
Strategies to minimise:
* budgeting; monitoring by authorisation to capture inappropriate spending, budget can be reduced by looking at historical data
Profitability Management- cost control
Expense minimisation
Common expenses include utilities, interest, insurance, wages, marketing, leases, rent.
Strategies:
* to reduce wages: hire on casual contrals, reduce hours, cut back staff, effective rostering, multiskilling, negotiate pay/conditions
* to reduce rent: negotiate lease, move to cheaper premises
* to reduce utilities: change supplier, implemement energy saving/producing tech
* to reduce ads/marketing: checking ROI (rationalisation), cut promotions and add others
Profitability Management- revenue control
Revenue controls
In determining acceptable leves, a business must have clear ideas and policies through marketing objectives
Profitability Management- revenue controls
Marketing objectives
A business will needed to monitor their sales and marketing objectives closely to ensure that they are in line with revenue needed to make profit.
Marketing objectives include:
* sales revenue
* market share
* brand awareness
Profitability Management- revenue controls
Marketing objectives: strategies
7Ps: marketing mix/plan, comes from market research and what target market wants.
* Product
* Price
* Promotion
* Place
* People
* Processes
* Physical evidence
Cash Flow Management
Cash flow
The volume, rate, and time cash comes in and out of the busisness. This affects working capital, how much cash/non-cash availavle to meet debts.
Cash Flow Management
Sources of cash
Operating Activities:
* in: proceeds from sales
* out: expenses paid
Investing Activities:
* in: proceeds from sale of asset
* out: purchase of assets
Financing:
* debt finance; O/D, commerical bills, mortgage, dividends
* out: loan repayment, interest, dividend paid
Cash Flow Management
Common problems in cash
- low profits:
- over investment
- too much stock, inventory management
- too much credit given
- overtrading; expands too quickly, pressure on ST finance, outlay
- seasonal trading
Cash Flow Management
strategies to manage cash flow
- Cash flow statements; projections, records, PMC
- distribution of payments; spread payment over longer period of time, ensure business isn’t starved of cash
- discounts for early payment (debtors); business has more cash and acc/rec, less risk
- discount for early payment (creditors); ST liabilities will be lower
- factoring; increase levels of cash but profitability lower and liquidity worse
