Financial Management Strategies Flashcards
Cash Flow
Movement of cash in & out of a business over a period of time
Distribution of Payments
A type of strategy to improve cash flow:
Involves spending expense payments throughout the year to ensure cash shortfalls do not occur
- Delaying the payments of Acc. Payable
- Leasing
Discounts for Early Payment
Offering creditors a discount for making payments before the due date
Advantages & Disadvantages of Early Payment
Advantage:
- Improve cash flow
- Improve relationship
Disadvantage:
- The business does not receive the full revenue of the sale
Factoring
Selling of Acc. Receivable at a discounted price to receive cash immediately
Advantages & Disadvantages of Factoring
Adv:
- immediate access to payment, improving cash flow
Disadv:
- the business does not receive the full amount
Working Capital
The funds available for the day-to-day financial commitments of a business
Working Capital = Current Assets / Current Liabilities
(same as current ratio)
Cash
Allows a business to repay its debt, loans, and acc. payable in the short term
allows the pursuit of investments
Receivables
Sums of money due to a business from paying its customers
-> quicker received the better cash position the business sits
Floor Stock Finance
An agreement where a business can receive goods for a period of time before payment is due
Consignment
Goods are supplied and are not paid for until sold -> returned if not sold
Payables
Sums of money owed by the business to other business
Strategies include:
- Holding on acc. payable until due date
- taking advantage of early payments
Overdraft
Allows a business’s account to be overdrawn to a certain amount
Sale & Lease Back
A business sells its own asset to another business and leases it back for fixed payments
Profitability Management
The monitoring of a business’s profitability & implementing strategies to increase profit
Fixed Costs:
Cost of Production that stays the same in the short-run regardless of the level of output
Examples:
- Rent
- Salaries
- Insurance
Variable Costs:
Cost of production that changes depending on the level of output
Example:
- Utility Bills
- Labour
- Transport
Cost Centres
Departments of a business to which costs can be directly attributed to
Strategies include:
- Clear Budgets
- Review Spending
Expense Minimisation
The process of reducing costs in an effort to increase profitability
Hedging
The process of minimising the risks associated with currency exchange
Derivatives (Financial hedging)
Type of hedging instrument used between global businesses to reduce the financial risks associated with currency fluctuations
