FINANCIAL MANAGEMENT STRATEGIES (INCLUDING CASE STUDY)

Cash Flow Management - ANS-the movement of cash in and out of a business over a period of time. Matching cash flow in with cash flow out is essential. Examples of inflows and outflows: Inflows: Sales, Cash Payment for accounts receivable, Commissions received, Sales of assets, Proceeds from issue of shares, Interest received (investments/loans, etc.), Dividends received. Outputs: Payments to suppliers - raw materials/finished goods, etc., Interest on loans, Operating expenses - wages/salaries; raw materials/finished goods, Drawings, Purchase of assets, Loan repayments. Cash Flow Statements - ANS-Provides a link between the income statement and balance sheet. indicates the movement of cash receipts and cash payments resulting from transactions over a period of time and can identify trends and can predict change. can show whether a business can: - Generate a favorable cash flow with inflows exceeding outflows - Pay financial commitments as they fall due - Have sufficient funds for future expansion or change - Obtain finance from external sources when needed - Pay drawings to owners or dividends to shareholders Management Strategies - ANS-Distribution of Payments, Discounts for early payment, factoring. Distribution of Payments - ANS-involves distributing payments throughout the month, year or other period so that large expenses don not occur at the same time and cash shortfalls do not occur. Advantages: More equal cash outflow each month rather than large outflows in some months Disadvantages: The business must have the equity to allow them to do this as some businesses may rather choose when the make payment periodically when they have the highest cash inflows. Discounts for Early Payment - ANS-offering debtors a discount for paying before the deadline of the business's credit policy. Advantages: Encourages creditors to pay on time decreasing follow ups and debt collecting costs, affects cash flow status in a good way with more concrete assets rather than credits. Disadvantages: The business gets less money because of the discount Factoring - ANS-selling of accounts receivable for a discounted price to a finance or specialist factoring company. Advantages: Saves on costs involved in following up on unpaid accounts, improves working capital, immediate access to funds improving cash flow and gearing Disadvantages: The full amount will not be received, involves great risk, expensive Working Capital - ANS-the funds available for the shirt-term financial commitments of a business. A business must have sufficient liquidity so that cash is available or current assets can be converted to pay debts. Creditors place importance on liquidity as they seek guarantees that their account will be paid. Net working capital is the difference between current assets and current liabilities and represents the funds that are needed for the day-to-day operations of a business to produce profits and provide cash for short-term liquidity. Working Capital Management - ANS-involves determining the best mix of current assets and current liabilities needed to achieve the objectives of the business. The more efficient a business is in organising and using its working capital, the more effective and profitable it will be. Control of Current Assets - ANS-important for monitoring working capital. Excess inventories and lack of control over accounts receivable lead to an increased level of unused assets leading in turn to increased costs and liquidity problems. Insufficient inventories and tight credit policies also lead to problems. Working capital must be sufficient to maintain liquidity and access to credit (overdraft) to meet unexpected and unforeseen circumstances. Cash - ANS-critical for business success, and careful considerations must be given to the levels of cash that are held by a business. ensures that the business can pay its debts, repay loans and pay accounts in the short-term, and that the business survives in the long-term. Planning for the timing of cash receipts, cash payments and asset purchases avoids the situation of cash shortages or excess cash. Cash shortages, may occur due to unforeseen expenses and money may need to be borrowed incurring interest. Receivables - ANS-sums of money due to a business from customers to whom it has supplied goods or services. It is important in the management of working capital. Procedures for managing it includes: - checking the credit rating of prospective customers - sending customers' statements monthly and at the same time each month so that debtors know when to expect accounts - following up on accounts that are not paid by the due date - stipulating a reasonable period, usually 30 days, for the payment of accounts - putting policies in place for collecting bad debts, such as using a debt collection agency the disadvantage of operating a tight credit control policy is the possibility that customers might choose to buy from other firms. The costs and benefits must be weighed up carefully by management. Inventories - ANS-make up a significant amount of current assets, and their levels must be carefully monitored so that excess or insufficient levels of stock do not occur. Too much or slow-moving will lead to cash shortages. Insufficient and quick-selling items may also lead to loss of customers, and lost sales. a cost to the business if it remains unsold and the holding of too much stock can lead to unnecessary expenses. Businesses must ensure that inventory turnover is sufficient to generate cash to pay for purchases and pay suppliers on time so they will be willing to give you credit in the future. Control of Current Liabilities - ANS-Minimising the costs related to a firm's current liabilities is important to the management of working capital and involves being able to convert current assets into cash to ensure that the business's creditors (accounts payable, bank loans or overdrafts) are paid. Payables - ANS-A business must monitor it and ensure that their timing allows the business to maintain adequate cash resources. The holding back of them until final due date can be a cheap means to improve a firm's liquidity, as some suppliers allow a interest-free trade credit period before requiring payment for goods purchased. Accounts must be paid before their due dates to avoid extra charges imposed for late payment and to ensure that trade credit will be extended to the business in the future. Controlling accounts payable involves periodic reviews of suppliers and their credit facilities e.g.: - discounts - interest-free credit periods - extended terms for payment, sometimes offered by established suppliers without interest or penalty. Loans - ANS-The management of these is important, as costs for establishment, interest rates and ongoing charges must be investigated and monitored to minimise costs. Control of these involves investigating alternative sources of funds from different banks and financial institutions in order to get the best 'deal'. Overdrafts - ANS-convenient and a relatively cheap form of short-term borrowing for a business. They enable a business to overcome temporary cash shortages. Banks that require regular payments to be made on overdrafts may charge account-keeping fees, establishment fees and interest. Interest payable for an overdraft is usually less than for a loan, but bank charges no need to be closely monitored as charges vary depending on the type of overdraft established. Businesses should have a policy for using and managing overdrafts and monitor budgets on a daily or weekly basis so that cash supplies can be controlled...