Financial Management Strategies

Question 1

What is cash flow

Answer 1

Cash flow is the movement of cash in and out of a business over a period of time.

Inflows - sales, interest received, dividend received

Outflows - payments to suppliers, interest on loans, purchase of assets

Question 2

Cash flow statements can..

Answer 2

Show movement of cash receipts + payments
Show when cash shortages may arise
Show due dates for financial commitments
Allow planning for dividend payments

Question 3

Sufficient cash is vital for:

Answer 3

Wages
Tax payments
Account payable
Overdraft payments
Lease + loan payments
drawings

Question 4

What are the 3 cash flow strategies

Answer 4

• distribution of payments
• factoring
• discounts for early payment

Question 5

what is distribution of payments

Answer 5

Distributing payments throughout the month + year so that large expenses do not occur at the same time + cash shortfalls do not occur

More equal cash outflow each month

Question 6

what is factoring

Answer 6

Selling accounts receivable for a discounted price to a finance or specialised factoring company

Improve cash flow

Business saves on the costs involved in following up on unpaid accounts + debt collection

Improves working capital

Question 7

what is discounts for early payment

Answer 7

Offering creditors a discount for early payments

Improve loan balance

Positively affects the maintenance of cash flow status

Question 8

what is working capital

Answer 8

WORKING CAPITAL involves determining the best mix of current asset and current liabilities needed to achieve the objectives of the business ( must hold sufficient funds to cover payments )
- indicates the amount of available cash to meet its short term debts

Question 9

working capital formula

Answer 9

NWC = current assets - current liabilities

• shows the extent to which current assets can cover current liabilities ( pay debts )

Question 10

control of current assets

Answer 10

• cash( pay for debt int he short run )
• receivable ( the quicker the debtors pay the better the businesses cash position )
• inventories ( must be monitored to ensure insufficient levels of stock do not occur )

Question 11

control of current laibilities

Answer 11

• payables ( holding back accounts payable until final due date - improve a firms liquidity position )
• loans ( short term funding )
• overdrafts ( cheap form of short term borrowing to overcome temporary cash shortages )

Question 12

what are the 2 working capital strategies

Answer 12

• leasing
• sale + lease back

Question 13

How does leasing help cash flow

Answer 13

Leasing ‘frees-up’ cash that can be used elsewhere in the business, thus improving the level of working capital.

Leasing allows 100% financing. Leasing allows firms to increase the number of assets they use.

Regular and fixed payments can
be planned to meet the business’s
cash flow.

Question 14

how does sale + lease back help cash flow

Answer 14

Involves the selling by a business of one of its assets to a leasing company (lessor) and leasing the asset back through fixed payments for a specified number of years.

Sale and lease back increases a business’s liquidity because the cash that is obtained from the sale is than used as working capital.