Financial Strategies 1 Flashcards
4 Area of Financial Management
- Cash Flow Management
- Working Capital Management
- Profitability Management
- Global Financial Management
Cash Flow Management
Matching of Inflow and Outflow
Cash Flow Management Strategies
- Cash Flow Statements
- Distribution of Payments
- Discount for early Payments
- Factoring
What are Cash Flow Statements
The movement of inflows and outflows from transactions over a period
How can CFS be Used
Used by financial managers to predict changes or identify trends, allowing for monitoring of cash flow to plan business operations to improve it
What is Distribution of Payments
A distribution of payments throughout a period of time instead of a lump sum at once
How can DOP be used
Can be used with cash flow statements to work with surpluses / shortfalls, allowing avaliability of cash when needed
What are Discounts for Early Payments
Debtors are able to receive discounts if they pay earlier (e.g if paid within 10 days, get 5% off)
How is DFEP used
Can be an incentive for debtors to pay earlier, allowing businesses to receive inflows faster. However, the business may miss out on additional profit
What is Factoring
Businesses can sell their Accounts Receivable to firms for a discounted price
How is factoring used
Can be used to receive cash quicker by selling the AR, instead of waiting for longer. However, the business may be missing out on additional profit by selling at a discount
Working Capital Management
The management of funds avaliable for short term commitments
- Calculated by Current Ratio (CA / CL)
Well / Poorly managed WC
Well
- Ensure profit opportunities can be made when they arise (due to surplus)
- Ensure creditors are paid on time (DFEP), short term obligations
Poor
- Force the sale of NCAs to raise cash
- Leads to less funds for long term use, less profits owners / shareholders
Controlling Current Assets
- Cash, receivables, inventory
What: Optimal amount of CA held, raising finance needed to fund them (CFM)
Effect: Ensures CAs are optimally used and liabilities are covered
Controlling Current Liabilities
- Payables, loans, overdrafts
What: CLs are taken care of within an appropriate time (best source of funds, DFEP, budgets)
Effect: Ensures obligations are met in short term without creating more costs
WC Strategies
Leasing, sale and lease back
Leasing
What: Hiring of an asset for an incremental fee
Effect: Frees up cash for use in other parts of business, improving WC
Sale and Lease Back
What: Selling of an owned asset and leasing the asset for fixed payments
Effect: Gains large lump sum, while retaining use of asset
