T1 PPT Financial principles of Asset Management Flashcards
What is one of the main reasons for business failure?
Lack of management of current assets, leading to poor liquidity.
Why is it important to manage cash flow effectively?
To ensure the business has enough cash to meet operating needs and pay expenses.
How can a business be profitable but still face liquidity problems?
If high profits come from credit sales and cash is not received promptly, the business may struggle to pay expenses.
What is the most common reason for poor liquidity?
Allowing accounts receivable to become overdue.
: How can a business improve liquidity?
By efficiently recording accounts receivable, ensuring prompt payments, and maintaining a good inventory turnover rate.
What are non-current assets?
Assets held for more than 12 months, usually requiring long-term financing.
Why must non-current assets be managed carefully?
Because they involve large sums of money, long-term commitment, and uncertainty about future economic conditions.
What is the risk of acquiring non-current assets?
They reduce available cash, affecting the ability to pay back other debts.
How can businesses optimize investment in non-current assets?
By considering costs, benefits, future returns, and selling or leasing surplus assets.
What is short-term debt?
Borrowing that must be repaid within 90 days to 12 months.
Why should budgets and cash flow statements be reviewed monthly
To plan for debt repayment and correct adverse trends before they occur.
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What happens if a business cannot repay short-term debt?
The business may become insolvent.
Why is financing short-term debt with long-term mortgages risky?
t can create long-term financial strain and instability.
How can businesses manage short-term debt effectively?
By improving purchasing power, minimizing waste, and using overdrafts responsibly.
What is long-term debt?
Debt that is repaid over 1-20 years, such as mortgages and debentures.
What is a mortgage?
A loan secured by real property or business assets.
What is a debenture?
A loan from the general public to a business.
What does ‘gearing’ refer to?
The percentage of borrowings compared to total assets
How do interest rates affect gearing?
High interest rates encourage lower borrowings, while low rates may make high gearing acceptable.
Why is high gearing risky?
business that owes more than it owns is financially vulnerable.
What is equity capital?
Funds invested by business owners (shareholders) to finance the business.
How is equity financing obtained?
By issuing new shares to existing or new shareholders.
What does a high debt-to-equity ratio indicate?
Higher financial risk for creditors and owners.
What happens if a business has too much debt financing?
It may struggle to meet interest and principal repayments.
What is the risk of having too much equity capital?
Difficulty in securing debt financing from financial institutions.
What is the consequence of too little debt financing?
he business may miss growth opportunities.
Why do financial institutions monitor the debt-to-equity ratio?
To ensure businesses meet lending requirements before providing funds.
What is an acceptable debt-to-equity ratio?
Typically between 1:1 and 4:1, depending on the business, economy, and industry.
