Chapter 12: Financial management strategies Flashcards
(63 cards)
1
Q
what is cash flow
A
cahs flow is the movement of cahs in and out of a bus over a period of time
2
Q
what are cash flow problems
A
cahs flow problems exist id here is more money going out than coming in
3
Q
what is cahs flow management
A
cash flow management involves strategies used to anticipate and prevent issues with cash flow to improve the liquidity of a bus
4
Q
what are cash flow statements
A
cash flow statements forecast and record cash inflows and outflows on a monthly, quarterly or yearly basis
5
Q
what do cash flow statements enable managers to do
A
- enable managers to anticipate the periods when the bus will have abundance or cash and when cash flow will be an issue
- then allow managers to plan and manage the cash flow position of the bus, making best use of available cash during surplus periods and being better prepared for periods when cash flow is tighter
6
Q
what are the five most common reaosns SMEs experience cash flow problems are
A
- debtors who are slow to pay accounts receivable
- failure to perform credit checks on debtors
- rapid or unsustainable grwoth
- tightened lending restrictions (harder to borrow)
- seasonality
7
Q
what are strats a bus can implement to manage cash flow
A
- distribution of payments
- discounts for early payment
- factoring
8
Q
what is the distribution of payments
A
aka ‘expense smooting’, involving spreading payment throughout the month, yr or other periods so that cash shortfalls do not occur as a result of large bills falling due at the same time
9
Q
what are discounts for early payments
A
involves offering debotrs a discount for early payments - effective for large debts
10
Q
what is factoring
A
an efective way for buses to quickly convert what is owed into cash to relieve a tight cash flow situation
11
Q
what is working capital
A
refers to the funds required to finance the day-to-day operations of a business and to meet its
short-term financial commitments
- exist bcos of the time lag manny buses face in their op cycle
12
Q
how does working capital vary form bus to bus
A
working capital reqments differ substantially b/w buses depending on the duration of their operating cycles
- eg fersh food oulets would req less than manufacturing bus, since their stock is turned over (paid for by customers) much more quickly
13
Q
what happens if a bus is unable to meet their obligations to creditors
A
they may have to sell non-current assets such as property or equipment leading to lower output and therefore revenue –> reduced profitability and ability to repay other liabilities in the long term
14
Q
define liquidity
A
it means that a business is able to meet its obligations to creditors as they fall due
15
Q
what are some benefits of having sufficient working capital
A
allows bus to pay creditors early to claim discounts, make regular investments such as updating equip or R&D, and to expand their ops to take adv of profitable opps when they arise
16
Q
what is working capital management
A
- involves determining the best mix of current assets and current liabilities
needed to achieve the objectives of the business - balance must be achieved b/w using funds to create profits and holding sufficient funds to cover payments
17
Q
what does having excess cash or inventory mean
A
- having excess cash hurts efifciency
- having excess inventory hurts efficiency and liquidity
18
Q
what do buses try to keep on hand to guard against sudden shortages in cash flow
A
- buses try to keep cash reserves at a minimum
- buses try to hold marketable securities (highly liquid such as shares and gov bonds) as reserves of liquidity
19
Q
what are some sound management procedures for getting accs receivable
A
- checking the credit rating of prospective customers
- sending statements monthly and at the same time each month so debtors know when to expect accounts
- following up on accounts not paid by the due date
- stipulating a reasonable period, often 30 days, for the payment of accounts
- putting policies in place for collecting bad debts, such as using a debt collection agency
20
Q
what is the disadv of using credit control policies
A
if its too tight, customers may choose to buy from other firms
21
Q
how does inventory influence liquidity
A
- too much inventory will lead to cash shortages
- too little inventory may lead to lost sales and loss of customers
22
Q
what is a one way if improving a firm’s liquidity position
A
holding back on accounts payable until their due date, however, sometimes it is more advantageous to pay early to claim discounts to reduce costs and improve cash flow
23
Q
what should a bus consider when trying to control accounts payable
A
- regular reviews of suppliers and their credit offers
- discounts
- interest-free credit periods
- extended terms for payments without interest
24
Q
what are two strategies increasingly being used by buses to manage working capital
A
- leasing - leasing free up cash that can be used elsewhere in a bus, improving the level of working capital
- sale and lease back - a bus selling an owned asset to a lessor and leasing the assets back through fixed payments for specified period of time (ie selling land to someone and then leasing it)
25
what is profitbility management
refers to the range of strats used by a bus to both minimise costs and expenses and increase revenues in order to maximise profits
26
what are cost controls
strategies implemented to improve the efficiency of a bus by reducing its operating costs in order to improve profitability (strats: management of fixed and variable costs, cost centres and expense minimisation)
27
how can buses minimise fixed costs
finding or negotiating the best deal when entering into arrangements or to take adv of discounts for early payment
28
how cna bsues minimise variable costs
- purchasing in bulk
- comparing budgets, industry standards and prev periods
29
what are cost centres
areas, departments or sections of a bus repsonsible for a particular set of activities that benefit the organisation and to which costs can be attributed
30
how does treating cost centres as separate units benefit buses
buses can measure how much they are spending on each function,
- making it easier to identify which sections inefficient
- keeping closer track of expenses allows for better budgeting and control costs for each centre, helping management utliise resources more efficiently and reduce total costs
31
what are direct costs vs indirect costs
- direct costs can be attributed to a particular product
- indirect costs are shared by more than one product (same equip can be used for multiple products so cost of purchasing, powering adn maintaining is considered indirect cos it cannot be attributed to just one product)
32
what is expense miniisation
involves reducing costs and expenses in order to maximise profits and gain a competitive advnatage
33
what are strategies commonly used for expense minimisation
- outsourcing
- replacing full time employees with casual employees
- replacing labour with tech where possible
- improving labour productivity
- using strats to reduce inventory costs eg just in time inventory management
- waste minimisation programs
- focusing on budgets and accountability
34
what is revenue
the income received from normal bus ops and other bus activities
35
what are revenue controls
revenue controls are designed to ensure that there is regular income flowing into a bus, and to increase these revenues to improve profit levels
36
what marketing objectives must be clear in determining acceptable levels of revenue
- sales objectives - sales targets must be pitched at a level that will cover costs and result in profit (ie must ensure revenue is sufficient to break even and maximise level of sales)
- sales mix - this is the range of products and sevrices sold by a bus (allows bus to expand revenue and reduce risk)
- pricing policy - pricing deicisons need to be carefully considered and closely monitored (outpricing can deter buyers and reduce revnue while underpricing may increase sales but bring lower profits)
37
what are factors that inflience pricing
- production costs
-compeititors' prices
- short and long term goals (eg lower prices to gain increasing market share)
- the image or perceived quality customers associate with the product
- gov policies (price floors and ceilings)
38
why are buses that engage in importing or exporting at greater risk
buses importing or exporting or considering expanding their ops overseas, they face a rnage of largely uncontrollable financial risks greaater than performing transactions domestically
39
define exchnage rates
the price of one currency in relation to another
40
what are exhcnage rates influnced by
Exchange rates fluctuate over time due to changes in supply and demand.
41
what do currency fluctuations (appreciation and dep) impact on the international compeititveness of aus buses
- an appreciation means our exports become more expensive on international markets hurting competitiveness, however the prices we pay for imports fall
- a depreciation makes our exports cheaper on international markets, improving the competitiveness of aus buses, however, imports become more expensive
42
how do currency flucs impact overall
currency flucs impact productoin cost and revenue (thus profitability) of aus buses. (changes in value of AUD affect production cost of buses sourcing inputs form overseas, and impact sales revenue of aus exporters)
43
what factors make international transactions far more complicated than domestic transactions (factors of international that domestic doesnt have)
- often delaing with buses with no face to face
- contact
- language barriers
- different currencies
- different legal systems
- greater difficulties resolving issues that may arise
44
what is the main concern for exporters in terms of international payemnt
if products are shipped before payment is received, the importer may not pay
45
what is the main concern for importers in terms of international payemnt
if payment is sent before the products are received, the exporter may not send the products
46
outline the process of international payment
aus exporter exports products to an importer which pays their currency to their bank which pays aus bank an agreed foreign currency and the aus bank pays the aussie AUD
(remark: buses generally use a thrid party (ie bank) to act as intermediary role)
47
idnetify the four basic methods of payment that a bus may select
- payment in advance
- letter of credit
- bill of exchange
- clean payment
48
what is payment in advance
this method allows the exporter to receive payment and then arrange for the goods to be sent - most secure method of exporters though few importers would agree since its risky
49
what is letter of credit
this involves a commitment from the importer's bank to pay the exporter a specified amt when documents proving shipment of good presented - popular method due to reliance of bank
50
what is a bill of exchange
this involves the exporter sending shipping docus to the imprter after goods sent, specifying that importer can collect after payment received (docu/bill against payment) or an agreement to pay in future is signed (docu/bill against acceptance) - widley used method that allows exporters to maintain control
51
what is clean payment
this is an open account payment method, where the exporter ships the goods directly to the importer before payment has been received, with invoice requesting payment by the end of the credit term - most advantageous for importers and riskiest for exporters
52
what determines the method sleected by the exporter
- the exporter's assessment of the importer's ability to pay (or creditworthiness)
- what method the importer will agree to
- the relo/lvl of trust b/w the two buses
53
order the methods of payment to least to most risky
- payment in adv
- letter of credit
- bill of exchange
- clean payment
54
why do exporters agree to be paid in foreign currency rather than their own iwth international transactions (two main reasons)
- importers will often have the choice of buying from a number of exporters from diff countries - quoting in US$ makes it simpler for importers to make decision based on price
- since currency movements impact the price of imports means that importers only need to forecast and monitor movements in their own currency against another currency to control costs
55
the payment is often not made until months after the transaction is agreed upon
why is this risky for exporters or importers
- aus exporters: unfavourble changes in ER will result in them receiving less than the agreed value of the exported goods (ie exporters are paid AUD/USD but AUD appreciates --> USD less value and AUD more expensive --> exporters paid less while still shipping same amt
- aus importers: risk depreciation of the AUD --> paying more than intended for imports
56
what is hedging
a variety of strats collectivley known as hedging in order to minimise such risks resulting from fluctuations in the value of currency ie hedging helps to reduce the lvl of uncertainty involved with international transactions
57
what are some strategies under hedging
- derivatives - financial products (offered by financial intermediaries) which come at some cost tp the bus but offer protection from currency movements ( or movements in price of other commoditiies)
- natural hedges - where the bus reduces its exposure to currency movements by arranging revenue and expenses from ops so that any adverse currency fluctuation turns into beenfits, cancelling the negative impacts
58
idnetify the 3 main derivatives available for bsues
- forward exchange contracts, aka future contracts
- options contracts
- swap contracts aka currency swaps
59
what are forward exchange contracts
are contracts to exchange one currency for another at an agreed ER at future fate (ie exporters are guaranteed the agreed amt from the sale and importers gain same certainty on the cost), regardless of ER changes
60
what are options contracts
contracts that give buses the right, but not obligation, to buy or sell at future date. protected from unfavourable ER flucs but maintain opp to benefit from ER movements
61
qhat are swap contarcts aka currency swaps
agreement b/w bus to exchange currencies, with agreement to reverse the exchange at a specified date in the future. eg a broker can match up an aus bus needing JPY with a jap bus needing similar amt AUD --> both take out loans in their respective currency and then swap without exposure to currency flucs and repay the loan
62
what are examples of natural hedges
- a bus that imports some of its inputs and exports some of its outputs can arrange to pay for imports and receive payment for exports in the same foreign currency
- a bus insisting all contracts for international contracts be written in AUS dollars whether importing or exporting - any risk will be transferred to the foreign bus
- a bus can use foreign subsidiaries to pay for imports or receive payment for exports
63
what is the main adv of swap contracts
they allow businesses to secure foreign currency without exposure to fluctuating exchange rates
