Financial Management Strategies Flashcards
Why are cash flow statements important to cash flow management?
Used to show the pattern of short-term management of cash inflow and outflow
Cash flow statements can prevent cash shortages by being used to plan ahead
It is possible to predict when cash will be needed and retain cash from earlier periods when cash inflow is much higher, thereby avoiding the need for more debt
How can the distribution of payments assist cash flow management?
A business can ensure that all large, predictable expenses do not occur at the same time
By spreading expenses over the whole year, the business will have a more equal cash outflow each month rather than one huge outflow during one month
A business can pay liabilities and expenses on the last possible due date, or alternatively choose to prepay expenses when it has cash
How can discounts for early payments improve cash flow?
Discounts to account debtors for early payment of their account may speed up cash flow
The business may also choose to shorten the credit terms it allows for account customers, or charge a late payment fee to cover its costs
How does factoring improve cash flow?
Accounts receivable can be sold to factoring businesses, creating an immediate cash flow
What strategy has McDonald’s recently employed to improve its cash flow?
Recently, McDonald’s have decreased the number of company stores and increased the number of franchised stores, thus generating cash from the initial sale and more stable income streams
In 2019, McDonald’s generated about US$8 billion in net cash from operations
What is the result of effective working capital management?
Working capital is the current assets used to fund the day-to-day running of a business
Effective working capital management will mean the business’s current assets will always be greater than its current liabilities
How can a business utilise cash to control current assets + McDonald’s example
The balance in the business’s bank account, cash is the most liquid asset
Needs to be available for unexpected expenses such as the repair of vital machinery
A business can increase the amount of cash it has through ‘sale and leaseback’ - the selling of non-current assets frees up capital, and makes it easier to budget for fixed installments
McDonald’s has contractual arrangements with franchisees for regular payment of rent and royalties (eg: royalty fees must be paid in full by the tenth day of the month)
This helps McDonald’s maintain significant cash flow from franchisees
How can a business utilise receivables to control current assets + McDonald’s example
The effectiveness of controls over accounts receivable is measured by the AR turnover ratio
Apart from factoring, discounting and late fees, businesses can increase turnover by:
imposing a credit limit on customers
checking the credit history of those who request credit
ask customers for a deposit on orders
Late payments of rent/royalties may attract high interest for franchisees
As a response to COVID-19, McDonald’s delayed the collection of around US$1 billion from franchisees in order to help maintain adequate liquidity
How can a business utilise inventories to control current assets?
Includes raw materials, work in progress and finished goods
Holding too much inventory will reduce cash to pay short-term debts, as well as involving costs for storage, insurance and monitoring
Methods for control over inventory include Just-In-Time (JIT) management, which reduced the costs of storing stock, and only invests cash in the bare minimum
McDonald’s relies 100% on external suppliers for inventory
McDonald’s stores use a FIFO inventory system
How can a business utilise payables to control current liabilities?
The money that a business owes to its suppliers
Paying bills too early is an inefficient use of cash, as the business should hold on to the money and use it to pay more urgent expenses first (unless early payments are discounted)
A strategy to control payables while keeping a good reputation and credit rating is to stretch accounts payable - pay invoices on the last day that they are due
How can a business use an overdraft to control current liabilities + McDonald’s example
Intended as a short-term finance, so should be used to fund short-term cash shortages
A business can control its overdraft by ensuring that all cash received is promptly deposited in the business’s overdraft account to reduce the amount owing
As a response to COVID-19, McDonald’s secured and drew upon a US$1 billion overdraft
It also has a further US$3.5 billion overdraft at its disposal should it be required
To keep this facility open, McDonald’s pays a fee of 0.08% ($2.45 million) per annum
What are two strategies for controlling working capital + McDonald’s examples?
Leasing
A method of obtaining an asset in return for a series of payments over a set period of time
Acquiring the asset will not use up cash available, and the expense will be spread
Additionally, the lease payments will be an expense and tax deductible
In 2018, McDonald’s was the lessee of 12,334 restaurant locations, and has built a further US$12.9 billion worth of buildings on land that it leases
This strategy allows more rapid expansion without large initial capital outlay
Sale & Leaseback
Will provide funds available to pay expenses as they fall due
The business can enter into a sales agreement that allows it to lease back the equipment and make monthly payments to the new owner
At its investor meeting in November 2015, McDonald’s specifically ruled out this strategy
What is the importance of fixed and variable costs to cost controls?
A business can increase profits by cutting costs in the areas of labour & inputs
Outsourcing of non-core functions has been the most popular method of reducing costs by larger organisations
Management’s control of costs will focus on variable costs, as there is more flexibility to eliminate waste; some strategies can include;
rationalising the supply chain
increasing customer self-service
using JIT inventory management
How does McDonald’s target variable costs?
McDonald’s adoption of an inventory system that responds to customer orders will assist in lowering the wastage of food and other inputs, which will lower the variable cost
Also, ensuring that the correct number of staff members are rostered on for varying demand patterns will assist lowering the variable component of wage costs
How can cost centres assist with cost controls?
These are centres that account for the expenses incurred by each key business function in providing a product to consumers
They do not produce a direct profit, and add to the cost of running a business
Management may provide the cost centres with a budget and monitor their expenses to minimise waste and achieve maximum use of resources
