Strategies Flashcards
CASH FLOW MANAGEMENT
Cash flow statements, Distributions of payments, discounts on early payment and factoring
Cash Flow statements
The use of cash flow statements (actual and forecasts) – these are an outline of cash transactions which have occurred/will occur over a specified period of time
Details the inflows and outflows of cash so a business can effectively plan to meet cash requirements (to pay accounts payable) as required.
The analysis of cash flow statements can lead to specific management strategies to deal with cash flow problems
Aiming to: avoid cash flow shortages, increasing cash
The reality is the cash flow statements provide the information that then the business can address the problem such as discounts for early payment, distribution of payments and factoring
Distribution of payments
This refers to how a business organises payments of accounts payable to creditors
Usually businesses will even this out over a year to ensure they have enough current assets (especially cash) to make payments and so maintain cash flow.
Implications
Spread payments out to take advantage of credit terms
Arrange large payments so that they do not come all at the same time
Discounts on early payments
A business may give debtors a discount for paying their accounts on time.
A business may invoke a late payment fee for payments received after the due
Implications
An increase in cash will occur
Although the discount will impact the profitability of the business
Factoring
What? - A business sells its accounts receivable at a discount to a firm that specialises in collecting accounts receivable (these are sometimes known as finance or factoring businesses)
Why? - This assists a business to gain immediate access to funds which can improve cash flow
However, a firm will not receive the full amount
When to use this strategy?
When stimulus has a large accounts receivable balance, or when the stimulus indicates that it is a B2B business context. Do not use if it is B2C – as these firms collect their money upfront (cash, credit sales)
WORKING CAPITAL MANAGEMENT
– control of current assets – cash, receivables, inventories
– control of current liabilities – payables, loans, overdrafts –
strategies – leasing, sale and lease back
Working capital ratio = Current Assets / Current Liabilities
Working capital = Current Assets - Current Liabilities
Control of CA - CASH
CASH:
BUS needs to plan for timing of cash receipts, cash purchases and cash purchases.
In order to avoid the situation of cash shortages or excess cash
Cash shortages can occur due to unseen expenses and they are a cost to the BUS. Money may need to be borrowed, incurring interest and perhaps set up costs
Control of CA - Reciveables
A BUS needs to control their accounts receivable and ensure their timing allows the BUS to maintain adequate cash resources.
Quicker the debtors pay, the better the BUS cash flow/position
BUS receives their ACC REC through reminders, discounts on early payments or taking legal action, ensure the credit rating of the debtor, send monthly statements to have consistent reminders at the same time of the month so they know when they will have to pay, putting policies in place for collecting bad debts (debt collector agencies)NOTE: CAN’T BE TOO AGGRESSIVE OTHERWISE MAY RUIN THE RELATIONSHIP
Control of CA - Inventories
WHY: Must be correctly monitored so that excess or insufficient stock does not occur.
HOW: Just in time (JIT) is a method used by BUS to ensure that the inventory isn’t lying idle. An arrangement is made with suppliers so that stock can arrive immediately.
POS =
Firm carries little or no inventory and relies on the supplier to fulfill orders as soon as required
If effectively managed - limits for the amount of inventory including costs
NEG=
Supply issues (supply chains like what happened in covid)
Too much inventory which has holding costs or slow moving inventory will lead to shortages in cash.
Insufficient inventory of quick selling items may also lead to loss of customers and hence lower sales.
Control of CL - Payables
BUS must monitor the payables
Ensures the maintenance of adequate cash flow
Pays only when it’s time to pay
Take advantage of discounts on early payments, interest free periods, extended payment terms
BUS will try and stretch the payment out as long as possible therefore acting like an interest free loan
Must pay when due otherwise their may be implications on their position
Control of CL - Loans
LOANS:
Short term loans can be an expensive form for a BUS and therefore should be minimised
Involves managing the short term loans often through budgeting
Control of CL - Overdraft
Needs to be managed effectively by the BUS
Is a short term loan from the bank, This is a safety value where the BUS can meet short term obligations by writing cheques which the bank will cover beyond the BUS has in it’s account.
Banks require that regular payments are to be made on overdrafts and may change account keeping fees, establishing Fees and interest is 9.75%.
Strats - Leasing
Payment for equipment, property owned by another party - Maintenance, insurance and other costs
Used to borrow funds to use a facility etc without purchasing
Maintenance costs are paid by the Lessor not the lessee
ADV: 1. Using an asset without buying 2. Less initial expense 3. Tax deductible
DIS: 1. Higher IR 2. Higher overall costs 3.Obligation for the entire lease term
Strats - Sale and Lease back
SALE AND LEASE BACK:
An arrangement when the Business sells one of its assets and then leases it back from them.
Boosts working capital since the payment of the sale is higher than the lease payments which therefore increases cash
Must consider does the BUS own the asset
ADV: 1. Using an asset without buying 2. Less initial expense 3. Tax deductible
DIS: 1. Higher IR 2. Higher overall costs 3.Obligation for the entire lease term
PROFITABILITY MANAGEMENT
– cost controls – fixed and variable, cost centres, expense minimisation – revenue controls – marketing objectives
