Strategies Flashcards

Question

**Working capital managment - Strategies** Sale and lease back

Answer 1

**Refers to the process of selling an one asset to a lessor and then leasing the asset back through fixed payments for a specified period of time.** Sell non-current asset and lease it back. * Motor Vehicles - Company car, van or truck * Retail/Office/Factory/Warehouse space * Machinery 1. Improves working capital / liquidity 2. Enables a business to receive a large cash injection from the sale of the asset 3. Repayments are an operating expense → tax deductible **CONSEQUENTLY** 1. Business loses ownership of the asset 2. Leasing has a rate of interest embedded onto the asset 3. Maintenance costs MAY be the responsibility of the business 4. Long-term: it MAY be more expensive.

Answer 2

Utilised sale and leaseback on production technology and robotics that they have developed for the production process (Foxbotts) - Increased cash from $35 Bn 2019 to $38 Bn 2020. - Improves DTE ratio in 2021 4.57:1 - Sale of machinery (Foxbots) to manufacturing plants (Foxconn, Wistron)

Answer 3

**Refers to those that are not dependent on the level of operating activity in a business.** * Fixed costs do not change when the level of activity changes - they must be paid regardless. **Strategies to Minimise FC** * Negotiate a better lease agreement * Negotiate better utility costs * Achieve economies of scale whereby fixed costs are spread over a larger volume - Decreasing the proportionate cost per unit of output

Answer 4

**Costs that vary in direct relationship to the levels of operating activity or production in a business.** * Wages, electricity, supplies **Strategies to minimise VC** * Lower energy costs by adapting energy-saving procedures * Negotiate discounts with suppliers/change suppliers * Labour-capital substitution (negative impact of this?) * Supplier consolidation (Reduce number of suppliers, bulk Buy)

Answer 5

**Effectively controls both fixed and variable costs - pursuit of achieving profitability and liquidity.** * Able to budget for lease agreements as Apple Retail Stores in shopping complex usually require monthly repayments * Due to high levels of sales (Sales Rev $366b 2021), able to bulk buy components from suppliers and achieve economics of scale - effectively addresses some of their variable costs (reduction in per unit costs) * Effectively reduce the cost of producing an iPhone 13 to $570 per unit * Has assisted with achieving an increase in net profit from $57b in 2020 to $95b in 2021

Answer 6

**Particular areas, departments or sections of a business to which costs can be directly attributed.** * **Place costs** to specific areas of the business - Expense analysis can be conducted more efficiently through targeting certain departments over others. * **Direct costs** - Those that can be allocated to a particular product, activity, department or region - Billboard advertisement can be direct attributed to the Marketing Dept. * **Indirect costs** - Those that are shared by more than one product, activity, department or region - Electricity **Strategies to Minimise Costs** * Set budgets for departments – Give accountability and ownership of costs * Target departments that incur the largest amount of (Unnecessary) costs – Reduce waste and improve efficiency * Offer incentives (Bonuses) if department keeps to their budget or comes in below. - All seek to increase profitability and improve efficiency

Answer 7

* **Assist with meeting profitability and efficiency** * Directs costs to specific divisions (Marketing & Communications), retail stores and geographical locations (Americas, Europe, Greater China, Japan, Rest of Asia Pacific) * Also use cost centres by product category EG iPhone, iPad, Mac, Services. * Assisted with Apple exceeding industry averages with their gross profit ratio, net profit ratio and expense ratio * Also track wastage at both the Foxconn and Pegatron manufacturing facilities - Does not exceed 12% of materials. * Assisted with achieving a net profit of $95b in 2021.

Answer 8

**Refers to those actions a business undertakes to reduce or take out expense.** * Economies of scale – By using less suppliers and bulk buying * Supplier consolidation - The process of minimising the number of suppliers so that costs between different suppliers can be minimised. 1. Improves the financial performance of the business 2. Improves efficiency (expense decrease in proportion to sales) 3. Improves profitability (operating expenses have decreases) **CONSEQUENTLY** 1. May impact quality such as Cheaper materials 2. Cutbacks may induce inertia within the business and lead to a poor workplace culture/worker dissatisfaction. 3. Limiting suppliers will increase the time and effort if one doesnt have adequate supplies thus negativley impacting effiency.

Answer 9

**Apple purchases its entire component parts for the iPhone in bulk (committing to more than 150 days worth of supply)** * Ensures they receive the lowest cost per unit and prepays for these component parts to receive a discount for early payment * Utilises outsourcing to countries with low minimum wage rates (China and India) and an abundance in resources (labour - specifically engineers) * Pre-purchase air freight at a discount * Apple has reduced their manufacturing cost to approximately $570 per iPhone 13, which then is sold at RRP $1699 in Australia (sales revenue) * Negotiating cheaper lease payments for retail stores (Due to their ability to drive high foot traffic) * Offshoring of profits to reduce tax expenses * Use of effective PR and product placement and a reduction in advertising expenses

Answer 10

**Change the mix as the customers and competitors change** _Product Strategy: Good/Service_ * A SWOT analysis or market research may allow a business to identify an opportunity in the market to expand their product range. 1. If successfully satisfies the needs and wants of the target market, the business may see an increase in sales revenue. 2. Allows fixed costs to be spread over a larger number of sales and ultimately improve profitability. **ADVERSLY** 1. The new product range may increase variable costs of production (larger range of materials) - More difficult to achieve economies of scale

Answer 11

**The way a business prices its products** * Need to be closely monitored and controlled * Must attract buyers, be competitive and make maximum profit 1. Charging a lower price can attract price sensitive consumers and undercut competitors – Increasing sales and market share **CONSEQUENTLY** 1. May impact on brand perception – Lower price may create the perception of lower quality 2. Can be difficult to determine in certain markets and for certain products (Quality vs price)

Answer 12

**Must cover all costs (FC/VC) and make a profit** * A cost-volume-profit analysis can determine the level of revenue sufficient for a business to cover its costs to break even, and predict the effect on profit of changes in the level of activity, prices or costs. 1. Better understanding of the market will assist with predicting future demand and sales revenue 2. Potential improvement with efficiency (More sales than expenses) , liquidity (Large net profit may result in more retained profits) and solvency (more retained profits = More equity) **HOWEVER** 1. Can be difficult to determine realistic sales objectives, especially with new products.

Answer 13

**Revenue Controls** * Effective in revenue control through achieving their marketing objectives * Customer loyalty - 85% of customers upgraded their iPhone to another iPhone in the past 3 years - link to profitability and growth **Pricing Policy:** * Implemented price points with their iPhones to target the diverse range of target markets (sales mix and price points) * iPhone 13 vary in price from $1199-1849 AUD **Sales Mix:** * Apple relies heavily on the successful sale of iPhones and Mac products – although services revenue from Services is increasingly important to their business - see Annual Report unit sales by product (services represents 18% of total revenue and increasing) **Sales Objectives:** * Due to the popularity of the Apple brand, price points, satisfying customer needs and wants, Apple has been able to achieve growth objectives with 35% market share in Australia, 36% market share in the US and 20% market share globally. Investment and sales growth in growth economies of China and India - Has assisted with achieving a net profit of $95b in 2021

Answer 14

* *Refer to the value of one currency in comparison to another currency. ** * The exchange rates of the world’s currencies constantly move up and down against each other based on supply and demand. The more in demand a currency is, the higher its price will be. Note; (Depending if Importing, or Exporting) _Strengthening/Appreciation of the AUD:_ 1. Cheaper to import (From Suppliers) 2. Likely to see a decrease in international sales (More expensive) 3. Negatively impacts on international competitiveness (Unfav for exporter) 4. May require change in price (Marketing) - Market-based and/or competition-based pricing method _Weakening/Depreciation of the AUD:_ 1. More expensive to import (From suppliers) 2. Likely to see an increase in international sales (Cheaper) 3. Positive impacts on international competitiveness (Favour exporter)

Answer 15

**Apple is a net receiver of foreign currency (revenue line – profitability)** * Approx. 67% of all sales ($245b) come from outside the US * With 515 retail stores in 25 countries, fluctuations are a regular occurrence This means that if there is a weakening of foreign currencies relative to the US dollar then this adversely affects Apple (Apple may then increase prices which will impact demand for the product) (decrease revenue and thus profit) * If foreign currencies are stronger that US dollar then this positively impacts Apple (revenue line thus profitability) * Much of the component supply of Apple’s products comes from outside of the US and if these foreign currencies are stronger than the US then this makes costs increase thus impacting Apple’s gross profit. - Use hedging and derivatives to address unfavourable exchange rate

Answer 16

**Refer to the price of money (cost of borrowing/reward for investing).** * Businesses can take advantage of cheaper overseas interest rates to gain a competitive advantage as this can lower costs of borrowing. **Lower interest rates (Globally)** * Provides opportunities for business to source funds from overseas * Reduces the amount of interest incurred * Allows a business to potentially borrow more funds (lending capacity may be larger due to lower interest charged) **Higher interest rates (Globally)** * Less incentive to source funds from overseas 1. The rate of interest can be cheaper 2. May have fewer restrictions 3. Finance may be acquired more quickly and easily **HOWEVER** 1. Sometimes the advantage of cheaper overseas interest rates are quickly lost as a result of exchange rate fluctuations (e g. depreciation in AUD)

Answer 17

**Apple is able to access low interest rates for e.g. borrow money in the US at 2% rather than repatriate $200b and be taxed at 21% in the US** * Cost effective, tax minimisation strategy leading to high profitability * Apple has approximately $288 in total liabilities and $162bn in long-term debt (2021) so sourcing low interest rates for their borrowings is an important financial objective - Average interest rate Apple pay is 1.5% - Total interest repayments in 2021 = $2.6b - US corporate tax rate is 21% (Previously 35%) - Foreign earnings tax in the US is 21% (As of 2017) - Under the Trump Administration, the US Gov’t attempted to entice multinational corporations to repatriate foreign earnings (Equating to approx. $3 trillion) by lowering the tax rate to 10-15% for the next 2-3 years.

Answer 18

**Refers to a broad term for reducing risk associated with currency fluctuations to remove the level of uncertainty involved with international financial transactions.** * Enables global businesses to pay without the risk of a negative movement in the currency impacting on their plans. (Natural hedging and derivatives)

Answer 19

**Establish off-shore subsidiaries** * Buying bulk goods when the price is low - The price may rise or fall in the future, but at least the good was bought for a price considered reasonable. * Pricing strategies in contracts that are pegged to an exchange rate * For e.g. Sign a contract for $1 million worth of product at a rate 0.72. If ER moves 2.5% up or down from this rate, then the price of the product moves accordingly, thus minimising ER exposure

Answer 20

**Financial instruments that may be used to reduce the exporting risks associated with currency fluctuations.** A derivative is a contract where the value of the contract is derived from or is dependent upon the value of another product. * It allows businesses to lock in the price of an asset at a later date. It gives the buyer/seller the right to buy/sell a product at a certain price in the future. 1. **FEC's** 2. **Currency Options Contracts**

Answer 21

**A contract to exchange one currency for another currency at an agreed exchange rate on a future date, usually after a period of 30, 90 or 180 days.** * The bank guarantees the exporter, within the set time, a fixed rate of exchange for the money generated from the sale of the exported goods. 1. If exchange rates fluctuate unfavourably, this would mean that the rate for FEC would be better. **CONSEQUENTLY** 1. Cost of purchasing the contract 2. Exchange rates may fluctuate resulting in the contract holding an unfavourable rate

Answer 22

**Contract gives the buyer (Option holder) the right, but not the obligation, to buy or sell foreign currency at some time in the future.** 1. Option holders are protected from unfavourable exchange rate fluctuations, yet maintain the opportunity for gain should exchange rate movements be favourable. 2. Allows the business the option to buy or sell foreign currency when the exchange rate movement is to its advantage. **HOWEVER** 1. Cost of purchasing the option contract 2. Risk is unlimited if you are seller (Writer) 3. Traded options are not available in all currencies

Answer 23

**Apple utilises** * Forward exchange contracts * Currency option contracts * Interest rate contracts * Apple chooses to hedge a portion of its materials to reduce foreign exchange exposures (12- month period) - Apple will enter into FEC and Currency Options contracts with financial institutions to protect against exchange rate risks with certain assets and liabilities * With annual sales revenue at $366bn, and 67% of these from outside the US, it is important that Apple is able to reduce their exposure and risk of exchange rate fluctuations.

Answer 24

**Allows the exporter to receive payment and then arrange for the goods to be sent.** * Lowest risk method for exporter (Seller) – Get paid upfront. * Highest risk for importer (Buyer) 1. Least risk for exporters - They receive payment before arrangement to export 2. A business can more accurately forecast demand → Managing operational expenses around demand 3. Prevents over/under producing → Impact on sales and profit **ADVERSLEY** 1. Few importers will agree to this as it exposes them to the most risk 2. May change suppliers with more favourable credit terms → loss of indirect channels → impact on growth 3. Importers have no guarantee that the goods will be sent

Answer 25

**Refers to a document that a importer can request from their bank that guartaanees the payment of goods will be transfered to the exporter. Promising to pay, once certain conditons have been met.** * Banks usually will only agree to a letter of credit if they know the buyer will pay. 1. Reduces risk and provides protection on both sides 2. Once commitment is made, bank cannot back out. 3. Popular with exporters as it relies on the overseas bank rather than the importer. 4. Useful when dealing with new or less-established trade relationships. **HOWEVER** 1. Relatively expensive due to bank fees 2. Some banks may not agree to provide a letter of credit if they are not sure the importer will pay 3. Required documents are detailed and prone to errors and discrepancies

Answer 26

**A document drawn up by the exporter (Seller) demanding payment from the importer (Buyer) at a specified time.** * Most widely used method * Similar to a letter of credit, except it is organised by the exporter rather than importer. - Document against payment (DAP) - Importer can collect the goods only after paying for them. - Document against acceptance (DAA) - Importer may collect the goods before paying for them. **IMPLICATIONS** * Higher risk than letter of credit - due to non-payment or payment delays * DAA expose the exporter to much greater risk than DAP * DAP - risk of importer not collecting the documents nor paying for the goods * DAA - risk the importer may delay payment or not pay at all. 1. Reduces risk on both sides **HOWEVER** 1. Costs extra to involve bank

Answer 27

**Occurs when the exporter ships the goods directly to the importer before payment is received.** * Highest risk method for exporter (seller) * More suitable for trustworthy relationships between client/supplier 1. No risk to the buyer (Importer) 2. Easiest and quickest method 3. Effective when there is a strong and reliable relationship between importer and exporter 4. Don’t have to involve a third party (Bank) - Thus, no additional fees **HOWEVER** 1. Very risky for the seller (Exporter) - may not receive payment

Answer 28

**Apple’s distribution centre in Elk Grove to JB Hi-Fi stores in Australia utilises a payment in advance method.** * No risk = profitability * Apple’s total export shipments totalled $178b in value (2020) * **Apple uses letter of credit with their suppliers,** such as Wistron (Taiwan) - printed circuit boards - **Uses clean payment for shipments of iPhone units** from Foxconn in China to Apple’s distribution centre in Elk Grove * Able to use due to the long-term relationship between the two companies * Encourages the need for continual strong relationships with Foxconn to benefit from such favourable arrangements - While Apple uses LOC and BOE, it does use prepayment with key component suppliers - To access favourable pricing terms, secure strategic raw materials and guarantee high volumes for production (Sure up supply)

Strategies Flashcards

(52 cards)