Home

Financial Strategies

Financial Strategies

 

 

Financial Strategies

Harrison Slattery

Financial Strategies
Financial Strategies to improve a business efficiency and profitability include:

  • Cash Flow Management
  • Working Capital Management
  • Profitability Management
  • Global Financial Management

Cash Flow Management
The flow of cash in and out of a business. Keeping a record of cash inflows and outflows can show managers how much money they have at any given time.


Cash Inflows

Cash Outflows

  • Sales
  • Accounts receivable
  • interest
  • sale of assets
  • Accounts payable
  • Payments to suppliers
  • Operating expenses
  • Interest on loans
  • Purchasing of new assets

 

Cash Flow Statement
Refers to the movement of cash receipts and cash payments resulting from transactions over a period of time ( a year or a month).  Provides managers with information to make up a budget for the business for the next year.

Management strategies
These are implemented to avoid cash shortfalls, and ensure cash is avoidable to make payments when due. Including:

Distribution of Payments

  • Where payments are distributed throughout the month so cash shortfalls don't occur. Payments aren't all at the same time.

Discount for early payments

  • Where discounts are offered to suppliers for early payments

Factoring

  • Where accounts receivables are sold to a company that collects them, and takes a percentage of collected debts.
  •  EXAMPLE: $1000 of debts are collected, the company takes 7.5% of those debts.

 

 

Working Capital Management (Liquidity)
Short term liquidity is important to a business. It means a business has enough cash on hand to pay expenses, meet financial commitments and operate. Without sufficient liquidity a business can't pay debts, purchase stock or operate their business, leading to failure.

Control of Current Assets
A business must control its current assets including:
Cash

  • Make sure the business has cash in the business to pay expenses, purchase stock and operate.

Receivables

  • The quicker debtors pay the better the firms cash position.

Inventories

  • Levels of inventory need to monitored so excess or insufficient levels of stock do not occur.
  • Too much/slow moving stock can cause cash shortages, can lead to lost sales too.

Control of current Liabilities
These are short term financial commitments. A business must monitor and manage them. Including:
Payables

  • Sums of cash owed by the business to other businesses it has purchased goods off. Businesses must monitor their payments that are owed, as it affects their liquidity.
  • A business can also take advantage of discounts.
  • If a business doesn't pay its debts, they risk damaging their credit rating

Loans

  • These are short term sources of finance
  • Loans need to be managed as interest rates are high and involve establishment costs and charges.

Overdrafts

  • Short term loan to overcome cash shortfalls
  • Business needs to make regular payments back to the bank, and interest rates need to be monitored

Strategies for working capital management
Strategies can be employed for working capital management. These include leasing, sale and lease back. 
Leasing
This is the hiring of an asset from another company who claims ownership.
Leasing 'frees up' cash that can be used elsewhere in a business. It is also tax deductible and regular payments can be made to fit the businesses cash flow.

Sale and Lease Back
Selling of an owned asset to a lessor and then leasing the asset back through fixed payments for a number of years.
Increases a business liquidity, because cash obtained from the sale can be used as working capital.

Profitability Management
This involves the control of both business costs and revenue, the minimisation of costs and the maximisation of profits. Accurate + up to date financial reports are tools for effective profitability management.

Cost Controls

  • The concept of a business maximising its profits by minimising its costs.
  • Business must manage fixed + variable cots, develop cost centres and practice cost minimisation

Fixed & Variable Costs

  • Fixed Costs do not change if the level of business activity changes. These can include salaries, deprecation, insurance.
  • Variable Costs change with the level of business activity. Including expenses, material and labour costs.
  • These need to be managed in comparison with budgets, standards and previous periods to ensure costs are minimised and profits are maximised.

                      Fixed Costs                                                                     Variable Costs
                    Do not change                                                                         They do change
financialfinancial

Cost Centres
These are areas of the business that incur costs, example office admin. The establishment of these in a business if a profitability strategy.
A businesses costs and expenses must be accounted for. By establishing these cost centres a business can identify their source and the amount.

Direct Costs – these that can be allocated to a particular product, activity or department.
Indirect Costs – Costs that are shared by more than one product, activity or department.

Expense Minimisation
A businesses profits can be harmed if the costs are too high. Guidelines and policies should be established to encourage staff to minimise expenses.
The savings to a business can be substantial if people take a critical look at costs and eliminate waste and unnecessary spending.

Revenue Controls
To determine an acceptable level of revenue a business must have clear ideas and policies about its marketing objectives including sales objectives, sales mix or pricing policy.

Marketing Objectives.
Sales objectives must be pitched at a level of sales that cover costs 9fixed and variable) and result in a profit for the business.
Changing the sales mix can affect sales, therefore affecting revenue. Businesses need a clear focus on their customers needs and wants to decide if its desirable to diversify or extend product ranges or ceasing certain product productions.
Pricing decisions should be closely monitored to ensure overpricing/underpricing does not occur.
Factors that influence pricing are..

  • Costs associated with producing good and services
  • prices charged by competition
  • short term/long term goals
  • Image/level of quality that people associate with the good/service
  • government Policies

 

 

 

Terms
Current Assets – Assets that can be turned into cash within a period of 12 months I.e stock, cash, accounts receivable
Non-current Assets – Assets that can be turned to cash after a period of 12 months I.e equipment, property.
Current Liabilities – Debts to the business that must be paid off with in a period of 12 months. I.e short term debts
Non-current liabilities – Debts that can be paid back after a period of 12 months. I.e a mortgage, leases on equipment
Working Capital – Cash for the short-term financial commitments of a business.
New Working Capital – Funds need for the day-to-day running of a business to produce profits and provides cash for short-term liquidity. Represents the DIFFERENCE between current assets and current liabilities

 

 

 

Source: http://www.acehsc.net/wp-content/uploads/Business_Studies_Notes_-_Financial_Strategies.doc

Web site to visit: http://www.acehsc.net/

Author of the text: indicated on the source document of the above text

If you are the author of the text above and you not agree to share your knowledge for teaching, research, scholarship (for fair use as indicated in the United States copyrigh low) please send us an e-mail and we will remove your text quickly. Fair use is a limitation and exception to the exclusive right granted by copyright law to the author of a creative work. In United States copyright law, fair use is a doctrine that permits limited use of copyrighted material without acquiring permission from the rights holders. Examples of fair use include commentary, search engines, criticism, news reporting, research, teaching, library archiving and scholarship. It provides for the legal, unlicensed citation or incorporation of copyrighted material in another author's work under a four-factor balancing test. (source: http://en.wikipedia.org/wiki/Fair_use)

The information of medicine and health contained in the site are of a general nature and purpose which is purely informative and for this reason may not replace in any case, the council of a doctor or a qualified entity legally to the profession.

 

Financial Strategies

 

The texts are the property of their respective authors and we thank them for giving us the opportunity to share for free to students, teachers and users of the Web their texts will used only for illustrative educational and scientific purposes only.

All the information in our site are given for nonprofit educational purposes

 

Financial Strategies

 

 

Topics and Home
Contacts
Term of use, cookies e privacy

 

Financial Strategies