Strategies Flashcards
cash flow management strategies - distribution of payments
- Spreading payments throughout the year - e.g. insurance premiums + council rates (paying monthly instead of yearly)
- ensures large expenses do not occur at the same time and cash shortfalls do not occur
- ensures more equal cash outflow each month rather than large outflows in particular months
cash flow management strategies - discount for early payments
- Paying bill when there is a surplus of cash
- most effective when targeted at creditors who owe large amounts over the financial year period
- (b) should take advantage of discounts
cash flow management strategies - factoring
- Selling of accounts receivable for a discounted price to a finance or specialist factoring company
- (b) think it’s better than overdraft or loan as bank will charge more than going to lose
- (b) saves on the costs involved in following up on unpaid accounts + debt collection, disadv: sold at discount - not get all that is owed to them
- One-off strategy - should not be used frequently = can be expensive
- improves liquidity at the expense of some of its working capital in the short term
Working Capital Management - control of CA (cash)
- Have a min set amount in bank account
- Encourage customers to use eftpos (more concrete record + is instant)
- Too much money in bank, start reinvesting into (b) + if below min or not enough money = budget + save
- Cash ensures (b) can pay its debts, repay loans + pay accounts in short term + ensures survival in long term
Working Capital Management - control of CA (accounts receivables)
- Credit + invoicing - have correct/efficient invoicing, credit check on consumer
- Set a credit limit - how much money extended to customer
- Discount for early payment - provides an incentive + encourages faster debt collection
- Also penalties for late payments to encourage efficiency
- could be done by using debt collection agencies or factoring = however are a cost to (b)
- (b) offer a shorter interest-free period
Working Capital Management - control of CA (inventory)
- Use JIT (stock only when needed) - decrease waste, storage + costs, therefore it’s more efficient + effective = managing it better - if have excess stock = may waste stock, lose money etc
- If have too much have a sale
Working Capital Management - control of CL (payables)
- Utilise any discounts for early payments
- Stall bill payment until right on due - keep money in (b) for long as possible → can improve a firm’s liquidity
Working Capital Management - control of CL (loans, overdrafts)
Loans:
- Be mindful of interest rates - shop around for best possible / cheapest interest rates
- Refinancing - if can find lower - change banks
Overdraft:
- Make sure have best possible interest rate = cheapest + best possible form of credit to reduce costs
- Not sustainable - need to look at alt strategies or other ways of managing cash-flow
Working Capital Management - strategies (leasing, sale and lease back)
Leasing:
- Is a means by which WC can be maintained w/o spending too much for NCA
- WC is reduced if a NCA is bought outright →
- leasing frees up cash that can be used elsewhere
- Assets depreciate therefore is better to lease than own
3 adv: is tax-deductible (reduces tax), maintenance is free, always have up to date tech
Sale and lease back:
- when a (b) sells its NCA, then leases it back (or in gen)
- Don’t want to be asset rich + cash poor - gives you cash that can be used to pay debt, reinvest etc → increase liquidity (cash obtained used as WC)
- Mainly applies to property and machinery
Profitability management - cost controls (fixed and variable)
Fixed costs: fixed regardless of level of production e.g. rent, lease
Variable costs: vary depending on the level of production e.g. electricity, water, materials therefore the only way to reduce costs is through variable
- (b) needs a budget to decrease its costs → can be done through EOS, lean production, a break-even point analysis
Profitability management - cost controls (cost centres, expense minimisation)
Cost centres:
- key function that generates costs e.g. operations, therefore cost is associated w/ production = need to reduce costs in this function to increase profit + savings
- e.g. EOS when purchasing inputs (reduces price per unit = increased savings = max profitability), lean production (reduce waste = max resources = improve efficiency + reduce costs = achieve expense minimisation)
Expense minimisation (least possible expenses):
- Through having policies + budgets e.g. travel budget, expense budget (assess use of funds + take corrective action - to reduce spending on unnecessary items), audit → people credit cards
- accountability within a (b) = expense minimisation
Profitability management - revenue controls (marketing objectives)
- use of marketing mix to increase sales + market share, thus profitability
- e.g. pricing (determining pricing will determine what sales are e.g. overpricing = loss of sales, underpricing = not enough revenue to cover costs) –> important in profitability + increasing cash-flow
- e.g. promotion: advertising: social media = increase market share = accessible to global market = increase sales + effetive financial management + profitability
- Link: to increasing net/gross profit ratios
- can guage which items are bestsellers + contribute most to revenue = include more of these types of items + delete less popular ones
Global Financial Management - exchange rates (RISK)
- Exchange Rate - value of one currency to another
- when transactions conducted on a global scale = one currency must be converted to another
- fluctuate over time due to variations in demand + supply
- results in an increase in costs
- Financial managers can ‘lock in’ ER through agreements e.g. hedging to try minimise risk
Impact of ER: - If appreciation in ER (Aus $ = worth more) - exports become more expensive, import prices fall = less comp overseas but more comp in Aus if outsourcing –> importing for cheaper, can borrow funds better
- If depreciation (Aus $ worth less) - exports become cheaper, import become more expensive = more competitve (can buy Aus goods cheaper), more exp to borrow funds from overseas
Global Financial Management - interest rates (RISK)
- cost of borrowing money
- IR in other countries are often lower, meaning cheaper loans
- can quickly change/fluctuate over time
- If IR increases = increased costs, level of debt, decreased profitability + impacts cash-flow
- RISK → need to pay loan back in local currency of the country sourced it from → end up costing more over time
Global Financial Management - methods of international payment (payment in advance, letter of credit)
Payment in advance: Where seller does not ship the product until full payment is received
- RISK: buyer (seller does not have to worry about non-payment - essentially no risk for exporter)
Letter of credit: where a bank (3rd party) guarantees payment on behalf of a buyer as long as seller meets conditions of the letter e.g. proving shipment of goods
- once committed no withdrawal
- Reduces risk as can usually rely on a bank to act honestly + will only make the payment once the deal has been honoured - bank usually charge a fee for service
- RISK = buyer but some risk seller
