SME (Topic 3) Flashcards
(24 cards)
What are SME
They are small medium sized enterprise
SME are price takers of price makers
SME are price takers.
What are the risks of SME
People risk
Financial risk
External parties risk
Legal/Compliance risk
What are price takers
Price takers can only accept prices that are given to them or prices in the markets because its own transaction cannot affect market price.
What happens as SME tries to build market shares
They may adopt easier credit policies when giving credit to custoemrs. This would increase their credit risk and liquidity risk faced by the SME.
What are treasurers?
There are risk managers that work to protect a business from financial risk it faces during operations
They manages risks related to change in interest rates, credit currency, commodities and operations that also affects the liquidity of the business.
What are the difference between accountant and treasurers
Accountant deals with details, post journal entries and produce financial statements allat
(MICRO VIEW)
BUT TREASURER is more of an analyst that consumed financial statement that is produced by the accountants and then join the dots of sources of risks that they see in order to advise the business.
(MACRO VIEW)
What is the difference between positive cashflow and negative cashflow?
Positive cash flow is when cash is coming into your business and leaving through A/P, Salaries expense month expense etc. Your cash coming into the business is still more than the cash flowing out
Negative cashflow is when the cash flow going out of the business exceeds that of the cash coming into your business (revenue). MAY be an indicator of trouble for a business BUT it is also common in business that are investing in fixed assets or expanding.
What is liquidity risk
It is a SHORT TERM RISK that your business is unable to finance its day to day operations
Why is liquidity risk a key constraint for SME
business needs to spend money then make money. SO intially, business may not be profitable or cannot breakeven. Liquidity is vital for small business.
How does business run out of cash (IEI)
Insufficient cash recipts -> not enough cash coming into the business
Excessive spending
Inability to obtain funds.
How does business manage their money?
Businesses will hold cash in their reserves to prepare for situations where they need to act fast.
BUT this can mean they are missing out on opportunites.
Instead, companies will invest a propotion of the cash into short term liquid securities.
this way instead of having cash sit idle, the company can earn returns on it. AND if a sudden need of cash occures, companys can easily liquidate these securities and convert them into cash .
What is cash and cash equivalents
It refers to the items on the balance sheet that reports the value of a company’s assets
EG bank accounts, marketable securities , commercial paper and short term gov bonds with maturity dates of 3 months or less
Working capital
Cash needed for day to day operations
What is the 2 ways to manage working capital
- Management of individual components of working capital
- Analysis of company accounts.
What does cash conversion cycle tell us.
It tells us how long cash is tied up.
Formula of cash conversion cycle
Days of inv + Days sales outstanding - days payable outstanding
What is days of inventory
Inv/sales per day
Tells us the time needed to convert our raw materials to finished goods and sell those finished goods
-> lower the DI, the better
A high DI may not always be bad: May be building up inventory ahead of time for events.
What is days sales outstanding (DSO)
A/R / sales per day
Measures cash you have tied up in unpaid invoices from customers
Days payable outstanding (DPO)
Accounts payable / Sales per day
Tells us the average number of days the business takes to pay its suppliers after receiving inventory or services.
Hence,
Tells how much bargaining power your business have with your suppliers.
Higher DPO = better
Whats a net working capital
Current assets - current liabilities
It tells us how much current asstes are available to meet other needs of the business
It is a measure of the reservs available to the business
What is current ratio
Current ratio = current assets / current liabilities
It measures whether a company’s current assets are enough to pay off its current liabilities.
A higher current ratio is best.
What is a quick ratio
measures a company’s ability to pay its short-term liabilities using only its most liquid assets — excluding inventory.
More stringent than currnet ratio.
Higher quick ratio is best.
Strats to manage liquid risk
Increase sales by lowering prices or increasing marketing
NOTE Could worsen if cash flow management was already bad.
Increase profit margin by cutting costs or increasing price
NOTE Need to be mindful of putting off customers bcs of too high of prices or bad quality from cutting costs.
Tighten cash processes
Decrease anticipated cash outflows -> CUTTING BACK ON INB PURCHASES/ CUTTING OPERATION EXPENSES.
