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Business > Business Finance - financial management strategies > Flashcards

Business Finance - financial management strategies Flashcards

1
Q

what are cash flow in businesses

A

a business must always have enough cash to pay bills , they must always be liquid enough to pay debts

business may have plenty of non-current assets and a lot of cash tied up in accounts receivable

creditor can put a business into receivership for nit being able to pay loan instalments

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2
Q

what are cash flow managements

A

financial reports are used to show patterns of short-term management of cash inflow + outflow (period of 12 months)

used to predict when cash will be needed to retain cash for periods of much with higher cash outflow, thereby avoiding debt

they involve;

  • cash receipts
  • cash payments
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3
Q

what are cash receipts (cash flow managements)

A

inflows of cash into the business

  • occurs when goods are sold or customers pay their debts (accounts receivable)
  • can be generated though sales of assets, rent and interest
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4
Q

what are cash payments (cash flow managements)

A

outflow of cash leaving the business. they could include;

  • payment for expenses
  • interest on a loan
  • payment to suppliers
  • loan repayments
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5
Q

what are cash flow statements (cash flow managements)

A 
strategies used to avoid cash-flow problems and retain cash from more profitable months
they include;
- distribution payments
- discounts for early payments
- factoring
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6
Q

what are distributions of payments (cash flow managements)

A

distribute payments throughout the month/year , or link in with periods of cash surplus

  • ensures that large, predictable expenses do not occur at the same time by spreading expenses
  • important to link outflows whenever possible to periods of cash surplus
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7
Q

what are discounts for early payments (cash flow managements)

A

offer of discounts to creditors for early payment of their accounts to speed up cash flow

this is implemented because quick payments will speed up cash inflow into businesses

there may be late payment fees for account holders who exceed payment period

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8
Q

what is factoring (cash flow managements)

A

factoring firm pays business the value of accounts receivable less its fee or commissions –> current asset is now worth less but it creates immediate cash flow

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9
Q

working capital management

A

used to describe the funds for short-term financial commitments of an organisation
- current assets need to be well managed and have sufficient liquidity

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10
Q

what is the net working capital

A

current assets - current liabilities

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11
Q

what is the working capital ratio (liquidity ratio)

A

current asset / current liabilities

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12
Q

what are control of assets (working capital management)

A
  • cash
  • receivables
  • inventories
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13
Q

What is the control of cash (control of assets)

A

cash ensures that the business can pay its debt, repay loans and pay accounts in short-term and that the business survives in the long-term

Businesses should try to keep their cash balances at a minimum and hold marketable securities as reserve of liquidity
–> can guard against sudden shortages or disruptions to cash flow

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14
Q

what are receivables (control of assets)

A

business must monitor accounts receivable and ensure that their timing allows the business to maintain adequate cash resources
- quicker the debtors pay, the better cash position of the firm

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15
Q

what are some receivable procedures (working capital management)

A
  • checking credit ratings of customers
  • follow up on accounts that are not paid by the due date
  • putting policies for collecting bad debt (e.g. debt collection agencies)
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16
Q

what are inventories (control of assets)

A

having too much cash invested in inventory (raw materials, work-in-progress, finished goods) is a cost if they remain unsold

  • -> business has used money to buy stock and now do not have enough to pay short-term debts
  • -> may lose stock which will be another cost
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17
Q

what are the control of current liabilities (working capital management)

A
  • accounts payable
  • overdrafts
  • loans
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18
Q

controls of accounts payable (control of current liabilities)

A

holding back accounts payable until their final due date can be cheap and improves firm’s liquidity position

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19
Q

controls of overdrafts (control of current liabilities)

A

overdrafts are a convenient way of dealing with deficits of cash in short-term

however, they should not be used to cover problems such as failure to collect customer debt effectively

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20
Q

control of loans (control of current liabilities)

A

loans are often used as a substitute for controlling accounts receivable

short-term loans are generally an expensive form of borrowing and should be used minimally

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21
Q

what are strategies for managing working capital (working capital management)

A
  • leasing

- sales and lease-back

22
Q

what is leasing (strategies for managing working capital)

A

hiring assets from another person/company

it ‘frees up’ cash that can be used elsewhere so the level of working capital is improved
- it is an expense and tax deductible

23
Q

what is sales and lease-back (strategies for managing working capital)

A

selling of an owned asset to a lessor and leasing back though fixed payments for a specified number of years
- increases business liquidity because the sales obtained sale is then used as working capital

24
Q

what is profitability management

A

involves the control of both the business’s costs and revenue;

  • cost controls
  • revenue control
  • marketing objectives
25
Q

what is cost controls (profitability management)

A
  • fixed and variable costs
  • cost centres
  • direct costs
  • indirect costs
  • expense minimisation
26
Q

what are fixed and variable costs (cost controls)

A

fixed costs are not dependent on the level of operating in a business. they do not change
E.g. salaries, depreciation, insurance / leases

27
Q

what are variable costs (cost controls)

A

are those that change proportionally with the level of operating activities
E.g. materials, labour, electricity/utilities

28
Q

what is cost centres (cost controls)

A

areas of a business which costs can be directly attributed

29
Q

what are direct costs (cost controls)

A

costs allocated to a particular product, activity, department

30
Q

what are indirect costs (cost controls)

A

costs shared by more than one product, activity, department or region

31
Q

what are expense minimisation :

A

profits can be weakened if the expenses of a business are high as they consume valuable resources within a business
- savings can be substantial if people take a critical look at costs and eliminate waste and unnecessary spending

31
Q

what are expense minimisation :

A

profits can be weakened if the expenses of a business are high as they consume valuable resources within a business
- savings can be substantial if people take a critical look at costs and eliminate waste and unnecessary spending

32
Q

what is revenue control (profitability management)

A

determining an acceptable level of revenue with a view of maximising profits, a business must have clear ideas and policies particularly about marketing objectives
–> sales objectives, sales mix or pricing policies

33
Q

what are marketing objectives (profitability managements)

A

sales objectives must be pitched at a level of sales that will cover costs
–> break-even and predict the effect on profit of charges in the level of activity, price or costs

overpricing could fail to attract buyers
underpricing may bring higher sales but still result in cash shortfall and low profits

34
Q

what influences the pricing (marketing objectives)

A
  • costs associated with producing goods/services
  • prices charged by the competition
  • short + long-term goals
  • image or level of quality associated with goods/services
  • government policies
35
Q

what are global financial managements

A

Financial risks associated with global expansions are greater as it opens additional external influences;

  • exchange rates
  • effects of currency fluctuations
  • interest rates
  • methods of international payment
  • hedging
  • derivatives
36
Q

What are exchange rates (global financial managements)

A

the value of the AUD is important and each day its value changes according to the performance of the Australian economy and others

37
Q

what are effects of currency fluctuations (global financial managements)

A

currency appreciation raises the value of the Australian dollar in terms of foreign currencies

if AUD is raised in terms of foreign currencies

  • exports are more expensive on international markets
  • imports are cheaper
38
Q

what is appreciation in terms of AUD (global financial managements)

A

an appreciation reduces the international competitiveness of Australian exporting businesses

39
Q

what are interest rates (global financial managements)

A

when a business plans to relocate offshore or expand domestic production facilities, they will need to raise finance

global businesses can borrow from financial markets in other countries with the aim to borrow at the cheapest price
- this is describes as ‘buying a security’
E.g. wall street in the US

40
Q

what are the negatives of global interest rates (global financial managements)

A
  • if the value of the home country’s money depreciates then interest repayments increase
41
Q

what are advantages of global interest rates (global financial managements)

A
  • rate of interest is cheaper
  • appreciation of currency makes cheaper interest payments
  • fewer restrictions such as amount borrowed, repayment period, conditions of loan
  • finance may be acquired more quickly and easily
42
Q

methods of international payment (global financial managements)

A

to meet the issues of both importers and exporters, methods using third parties is implemented. these include;

  • payment in advance
  • letters of credit
  • bills of exchange
  • clean payment
43
Q

what are payments in advance (methods of international payment)

A

allows exporters to receive payment and then arrange for goods to be send

  • exporter has no risk
  • often used if the importer is a subsidiary or when the credit worthiness is uncertain
44
Q

what are letters of credit (methods of international payment)

A

commitment by the importers bank, which promises to pay the exporters when the document proving shipment of goods are present
- offers less risk for importers

45
Q

what are bills of exchange (methods of international payment)

A

a document drawn up by the exporter demanding payment from the importer at specified time
- exporters maintain control over goods until payment is made

46
Q

what is clean payment (methods of international payment)

A

payment is sent, but not received by the exporter until goods are transported
- only be used if there is a high level of trust between importer/exporter

47
Q

what is hedging (global financial management)

A

process of minimising risks of exchange rates fluctuations

  • transaction finalising deals are called, ‘spot exchange rate’ can bring risk due to the value of the currency appreciating or depreciating before payment is made
48
Q

what are derivatives (global financial management)

A

to minimise risks involved with exporting, financial institutions develop new products;

  • forward exchange contract
  • options contract
  • swap contract
49
Q

what is forward exchange contract (derivatives)

A

contract to exchange one currency for another at an agreed exchange rate on future dates (30,90,180 days)
- bank guarantees the exporter, within a set time, a fixed rate of exchange

50
Q

what is options contract (derivatives)

A

option that gives the buyer the right, but not the obligation to buy or sell foreign currency at some time in the future

  • protected from unfavourable exchange rate fluctuation
  • maintains opportunity for gains should exchange rate movements be favourable
51
Q

what is swap contract (derivatives)

A

an agreement to exchange currency in the spot market with an agreement to reverse the transaction in the future

used when business needs to raise finance in a country they do not know well of and are forced to pay higher interest rates

Business (12 decks)

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