Financial Strategies 2 Flashcards
Profitability Management
- Cost Controls (Fixed / Variable, cost centers, expense minimisation)
- Revenue Controls (Marking objectives)
Fixed and Variable Costs
Fixed: Not dependent on level of operating activity
Variable: Vary according to activity or production
Effect: Managing Fixed / variable costs allows for reducing expenses, e.g changes in activity need to correspond with expenses
Cost Centers
Areas, departments, or sections of a business that costs can be attributed to
Effect: By making these areas separate, the business can identify the needs / costs of this function
Expense Minimisation
Examination of activities to decide if costs need to be cut without impacting production
Revenue Objectives
Increasing revenue to increase profits needs to use marking objectives
- Sales mix, pricing policy
- 4PS (Product, price, place, promotion)
Global Financial Management
- Exchange Rates
- Interest Rates
- Methods of International Payment
- Hedging
- Derivatives
Exchange Rates
Value of different currencies globally, affecting revenue, operating costs, profits
- E.g $1 AUD = $0.77 USD
Appreciation / Depreciation with Import / Export
AUD Appreciation
- Cheaper to export, more expensive for foreign countries to import
Interest Rates
Cost of borrowing
- Foreign interest rates are affected by exchange rates
- Flucuations in exchange rates can affect cost of interest rate, impacting profitability
Methods Of International Payment
- Payment in Advance
- Letter of Credit
- Clean Payment
- Bill of Exchange
Risk Level for Exporter
Least
- Payment In Advance
- Letter of Credit
- Bill of Exchange
- Clean Payment
Most
Payment in Advance
Exporter receives money from importer first and then sends goods (Riskier for importer)
Letter of Credit
A commitment by the importer’s bank, promising to repay the exporter when documents for the goods are presented
Bills of Exchange
Document drawn by exporter requiring payment at a specified time, goods are released when it is paid (Exporter maintains control)
Clean Payment
Exporter delivers goods before payment
Hedging
Process of minimising risk of financial transactions / currency flucuations (E.g risk of time lag inbetween payment, exchange rates)
- Insuring against a negative event
Derivatives
Instruments used to reduce exporting risk with currency fluctuations
- Foward exchange contracts
- Options Contract
- Swap Contract
Foward Exchange Contract
Exchange one currency for another at an agreed exchange rate at a future date (30, 90 days)
- Guarantees a fixed rate of exchange for the money generated for the exported goods
Option Contract
Gives buyer the right to buy or sell foreign currency in the future for an agreed rate
- Option holder is protected from unfavourable rate fluctuations
Swap Contract
Agreement to exchange currency on the spot market with an agreement to reverse the transaction in the future
