FMS - cash flow management

Question 1

what are financial strategies?

Answer 1

o Ratio indicate the present financial position and performance of the business
o Various strategies are then used to improve this performance and achieve desired outcomes/financial objectives
o These objectivise include: better cash flow, better solvency/lower gearing; increased profitability or return on equity; minimised expenses and increased efficiency

Question 2

areas of financial statements

Answer 2

o Cash flow management
o Working capital management
o Profitability management

Question 3

Cash flow management

Answer 3

ensure cash is on hand to pay bills

Question 4

Working capital management

Answer 4

maintain the value and liquidity of current assets

Question 5

Profitability management

Answer 5

improve the net profit earned by the business

Question 6

cash flow statements

Answer 6

o Unlike the income statements and balance sheets, they are not used to calculate our financial ratios
o However, the businesses cash flow position can be determined by examining it and calculating the difference between inflows and outflows (or net cash/cash balance)

Question 7

cash flow strategies

Answer 7

o Cash flow is the movement of cash in and out of a business over a period of time
o If more money goes out than comes in, or if money must be paid out before cash payments have been received, there is a cash flow problem matching cash flow in with cash flows out is essential

Question 8

the aim of cash flow strategies is to ensure:

Answer 8

 Inflows are received in full and on time

 Timing of outflows is managed to ensure funds are available.

Question 9

There are specific cash flow strategies to ensure aims of CFS is met

Answer 9

 Distribution of payments
 Discounts for early payments
 Factoring
o A business may have temporary shortfalls of cash. Many businesses use overdrafts to cover these shortages.

Question 10

distribution of payments

Answer 10

o This strategy involves distributing payment throughout the month, year or other period so that large expenses do not occur at the same time and cash shortfalls do not occur
o This means there is a more equal cash outflow each month rather than large outflows in particular months.
o A cash flow projection can assist in identifying periods of potential shortfalls and surpluses

Question 11

discounts for early payments

Answer 11

o Another cash flow management strategy is offering debtors a discount for early payments
o This strategy is most effective when targeted at those debtors who owe the largest amounts over the financial year period
o This is not only beneficial for the debtors who are able to save money and therefore improve their cash flow, but it also positively affects the businesses cash flow status (at least in the short term)

Question 12

factoring

Answer 12

o Factoring is the selling of the business accounts receivable for a discounted price to a finance or specialist factoring company
o The business saves on the costs involved in the following up on unpaid accounts and debt collection
o Definite benefits but limitations too.
o The factoring company doesn’t have a relationship with the debtors, the factoring operators do not have a care, it may jeopardise the relationship you have with a customer as they feel pressured and intimidated.
o Less effective strategy in comparison to discounts and distribution