3.5.4 Financial Management Flashcards
(15 cards)
What is cash flow?
The movement of cash in and out of a business over a period. Positive cash flow means inflows exceed outflows.
Why is improving cash flow important?
• Ensures liquidity
• Avoids insolvency
• Enables timely payments to suppliers/staff
• Supports day-to-day operations
What are methods of improving cash inflow?
• Reduce credit period offered to customers
• Encourage prompt payment (e.g. discounts)
• Chase late payments more aggressively
• Sell assets
• Secure new sources of finance
• Increase prices (if demand is inelastic)
What are methods of reducing cash outflow?
• Delay payments to suppliers (extend payables)
• Reduce overhead costs (e.g. rent, utilities)
• Lease rather than buy equipment
• Use overdrafts for short-term needs
• Control inventory levels
What is profit?
The financial gain from business activity, calculated as Revenue – Total Costs.
What is profitability?
A measure of how efficiently a business converts revenue into profit, usually expressed as a profit margin.
What are methods of improving profit?
• Increase revenue by raising prices or sales volume
• Cut costs (e.g. labour, materials, overheads)
• Improve productivity
• Outsource non-core functions
• Reduce waste and inefficiencies
What are methods of improving profitability?
• Focus on high-margin products
• Improve contribution per unit
• Reduce variable costs per unit
• Better pricing strategy
• Eliminate unprofitable lines
What’s the difference between improving cash flow and improving profit?
• Improving cash flow focuses on timing of money movements.
• Improving profit focuses on increasing net financial gain.
A profitable business can still have cash flow issues if cash is tied up in receivables or stock.
What are difficulties in improving cash flow?
• Delaying payments can damage supplier relationships
• Reducing credit terms may lower sales
• Selling assets may reduce capacity
• Relying on short-term finance may increase costs
What are difficulties in improving profit/profitability?
• Cutting costs may affect quality/customer satisfaction
• Raising prices may reduce demand
• Redundancies can lower staff morale
• Changes may take time to implement and show impact
Why is short-term cash flow management not always enough?
It doesn’t address long-term issues like low profitability, structural cost problems, or declining sales.
How does inventory control improve cash flow?
Reducing excess stock reduces money tied up in unsold goods and lowers storage costs.
How can outsourcing improve profitability?
It can reduce fixed and variable costs by using specialised external providers, often at a lower cost.
How does improving labour productivity impact profits?
Increases output per worker, reducing cost per unit and boosting operating profit margin.
