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Yr12 Business Studies > Financial Management Strategies > Flashcards

Financial Management Strategies Flashcards

1
Q

What is cash flow

A

The cyclical flow of cash in and out of the business. If more money goes out than comes in (i.e. more paid out than received), then there is a cash flow problem.

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2
Q

What does keeping records of cash flow show

A

By keeping records of cash flow, you know how much cash you have at a given time. However, this record does not tell you what debts you have

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3
Q

What does a cash flow statement do

A

Forecasts monthly inflows and outflows of business à which helps business managers meet financial obligations and respond to periods of cash shortages and surpluses

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4
Q

How can a cash flow statement help managers

A
  • Can help identify trends and can be used as a useful predictor for change
  • Helps managers plan
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5
Q

What are cash flow management strategies

A
  • Distribution of payments
  • Discounts for early payments
  • Factoring
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6
Q

What does distribution of payments involve

A

Distributing payments throughout the month or year so that cash shortfalls do not occur

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7
Q

Whats an exmaple of distribution of payments

A

Pay insurance monthly instead of annually

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8
Q

What is factoring

A

Selling of accounts receivable for a discounted price to a specialist factoring company

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9
Q

How does factoring help businesses

A
  • Get access to cash sooner
  • Guaranteed funds
  • Saves on costs of debt collection
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10
Q

What are discounts for early payments

A

Reductions in the price of the good or service if payment is made earlier than required

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11
Q

What does discounts for early payments do

A

Encourages quick payment from customers (debtors), improving cash flow

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12
Q

Example of discounts for late fees

A

Airline company’s offer cheaper fares for people who book sooner

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13
Q

Why is discounts for early payments better than late fees

A

Encourages positive relationship with customers (late fee may be necessary for stopping debtors consistently paying later)

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14
Q

What is working capital

A

Working capital is the term used to describe the funds available for the short-term financial commitments of a business and is essentially, the difference between current assets and current liabilities

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15
Q

What is working capital formula

A

Current assets - Current liabilities

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16
Q

Why is working capital needed

A

Needed so that a business can extend credit to customers (accounts receivable), buy stock/inventory and meet its own current debts

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17
Q

What does insufficient working capital mean

A

Means there are liquidity problems

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18
Q

What may liquidity problems lead to

A

May force the business to increase debt or sell off non-current assets à which may undermine the productivity of the firm

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19
Q

What does excess working capital mean for a business

A

Limits the options for growth, profit and expansion and some of the current assets should be converted to non-current assets to expand production capability.

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20
Q

What does working capital management involve

A

Determining the best mix of current assets and current liabilities needed to achieve the objectives of the business

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21
Q

What is working capital ratio

A

Same as current ratio Current assets/current liabilities

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22
Q

What does a high current ratio mean

A

May reduce long term profitability à since business is choosing to reduce risk of not being able to pay its debts by having more liquid assets

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23
Q

What does low current ratio mean

A

That the business is more profitable if it is investing its resources in longer term productive assets à but there is a risk that the business may not be able to pay its current liabilities

24
Q

What are working capital management sections

A
  • Control of current assets
  • Control of current liabilities
  • Leasing
  • Sale and lease back
25
Q

What are current liabilties

A
  • Current liabilities are financial commitments that must be paid in the short term (within 12 months) and meeting these as they fall due and minimising costs is an important part of management of working capital
26
Q

What are the different current liabilities

A
  • Accounts payable
  • Loans
  • Overdrafts
27
Q

What are payables

A

Amounts owed to other businesses who are suppliers – referred to as ‘trade credit’

28
Q

What are strategies to control payables

A
  • Payment on time (avoid late fee)
  • Taking advantage of early payment discounts
  • Maintaining good credit rating for continuing access to lines of credit provided by suppliers
  • Hold off payment till date2 (not ethical)
29
Q

What are strategies to manage short-term loans

A

Preparation of cash budgets and cash flow statements to help ensure cash is available to meet loan repayments

30
Q

What are overdrafts

A

Convenient & relatively cheap form of short-term borrowing enabling a business to overcome temporary cash shortages (overdrawing bank account)

31
Q

What are strategies to manage overdrafts

A
  • Monitoring to ensure that the balance is not consistently above agreed limits, otherwise the bank may demand immediate repayment.
  • Also, same strategies as for short term loans
32
Q

What are strategies for managing working capital

A
  • Leasing
  • Sale and lease back
33
Q

What does leasing involve

A

The payment of money for the use of equipment or property/land, that is owned by another party. A lease is a contract between the lessor (owner) and lessee (user of the asset)

34
Q

What are advanatages of leasing

A
  • An asset is obtained without the one-off large cash outlay. Therefore, leasing frees up cash that can be used elsewhere in the business to create revenue.
  • Regular and fixed payments are made and can be planned to match cash flow.
  • It essentially matches the cost of the equipment with the revenue benefit generated by the asset.
  • The cost is an expense and is tax deductible.
  • It allows the business the flexibility to upgrade to new and better assets
  • Depending on the terms of the agreement, it reduces the risk of unpredictable costs associated with the repairs and maintenance of equipment (or property)
  • No deposit is required (as for a loan a 5 or 10% deposit is required) and
  • leasing is in effect 100% financing
    *
35
Q

What is sale and lease back

A
  • The selling of an owned asset (a non-current asset on the balance sheet) to a lessor (landlord) and leasing the asset back through fixed payments for a specified number of years (usually real estate).
36
Q

What does sale and lease back do

A

Increases a business’s liquidity because the cash that is obtained from the sale is then used as working capital and can be used to expand production

37
Q

What is profitability management

A
  • Profitability management involves the control of both costs (fixed and variable costs) and revenues.
38
Q

What must business do to maximise profits

A
  • keeps costs under control and
  • increase revenues
39
Q

Within cost controls what must business manage

A
  • Fixed and variable costs
  • Costs centres
  • Expense minimisation
40
Q

What are fixed costs

A
  • Do not vary with level of output, e.g. insurance, rent
41
Q

How should businesses keep fixed costs low

A
  • Businesses should negotiate adequate arrangement at the outset or take advantage of early payment discounts
  • Should also seek competitive quotes on costs such as insurance
42
Q

What are variable costs

A

Vary with the level of output e.g. raw materials, labour, petrol

43
Q

How can businesses save on variable costs

A

Savings may be able to be made through bulk purchases and careful monitoring and use of alternative suppliers à supply chain management

44
Q

What are cost centres

A

Particular areas or departments of a business to which costs can be directly attributed and the manager will be held accountable for these à (and more likely to keep costs to a minimum).

45
Q

What do cost centres allow managers to do

A

Allows managers to measure, budget and control costs for each specific function

46
Q

What is expense minimisation

A

This is reducing expenses (in the longer term) to gain a competitive advantage and thereby maximise profit (this is a cost leadership approach)

47
Q

What are expense minimation strategies

A
  • Outsourcing
  • Replacing full time with casual employees
  • Improving labour productivity
  • Reduce inventory
  • Overheads
48
Q

What are revenue control strategies

A
  • Sales objective
  • Sales mix
  • Pricing policy
49
Q

What does sales objectives involve

A
  • Businesses must set clear, realistic objectives regarding sales targets and market share to give sales staff clear, realistic targets to work with which should motivate them to achieve these
50
Q

What is the sales mix

A

The mix of products a business offers for sale

51
Q

What should businesses do to manage sales mix

A
  • Business should review each product’s profit margin contribution and develop those with the highest and phase out those with the lowest
52
Q

What does pricing polciy affect

A

revenue and hence working capital

53
Q

What are risks of pricing

A
  • Overpricing could fail to attract buyers and under-pricing may attract higher sales but still result in cash shortfalls and low profits
54
Q

What are factors influencing pricing

A
  • Production costs
  • Competitors pricing, quality image
  • Long term objectives regarding market share
55
Q
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56
Q
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Yr12 Business Studies (17 decks)

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