Business & Finance terms

• Strategic financial management involves managing a business' financial resources
• The goal of strategic financial management is to achieve business goals and maximize business value
• Management identifies financial objectives, analyses data, and makes long-term growth decisions
• The four main areas of financial management are cash flow, working capital, profitability, and global financial management

Financial Management Strategies

• Financial management strategies include managing cash flow, working capital, profitability, and global finance

Cash Flow Management

• Cash flow management involves strategies related to cash flow statements, distribution of payments, early payment discounts, and factoring

Working Capital Management

• Working capital management involves controlling current assets and liabilities
• Control strategies include leasing and sale-leaseback transactions

Profitability Management

• Cost control strategies include fixed and variable costs, cost centres, and expense minimization
• Revenue control strategies involve setting marketing objectives

Global Financial Management

• Global financial management addresses exchange rates, interest rates, international payments, hedging, and derivatives

Cash Flow Management

• Matching cash inflows and outflows is essential for businesses to maintain liquidity and pay expenses

Cash Flow Statements

• Cash flow statements, also known as continuous or rolling cash budgets, show short-term cash inflow and outflow patterns

Distribution of Payments

• Distributing payments ensures expenses do not occur simultaneously to maintain consistent cash flow

Payment Distribution Strategies

• Prepaying expenses avoids non-payment
• Paying in installments avoids large lump-sum payments
• Leasing distributes the equipment cost over the leasing term

Early Payment Discounts

• Discounts can be offered to customers who pay early, speeding up cash inflows
• Businesses may shorten the credit term to ensure earlier payment, which also speeds up cash inflow
• Late fees may be charged to cover costs associated with late payment

Factoring

• Accounts receivable are amounts owed to the business from credit sales
• These accounts can be sold to a factoring business at a discount for immediate cash inflow

Working Capital Management

• Managing working capital requires finding the best balance of current assets and liabilities to achieve business goals
• Effective working capital management ensures that a business's current assets are always greater than its current liabilities
• The working capital ratio, also known as the current ratio, can be used to evaluate working capital management

Control of Current Assets

• Controlling current assets involves ensuring there are enough liquid assets to meet current liabilities when they fall due

Cash

• Cash ensures a business to pay its short-term debts and survive in the long-term
• Cash management strategies include planning cash inflows and outflows and sale/leaseback

Receivables

• Accounts receivables turnover ratio measures credit sales
• Aim to maintain adequate cash resources through working capital management and appropriate timing

Receivables Strategies

• Early payment discounts can encourage prompt payment
• Factoring accounts receivable involves selling receivables to a third party for immediate cash
• Late payment fees can encourage timely payment
• Setting credit limits limits the risk of non-payment
• Checking credit history assesses customers’ ability to pay
• Regular reminder notices can prompt payment
• Refusing credit to late payers limits the risk of default
• Taking deposits on orders secures partial payment upfront

Inventory

• Inventory levels must be monitored to avoid shortages, which are bad for business, and surpluses, which incur storage costs

Inventory Management

• Inventory turnover should generate enough cash for purchases and supplier payments

Inventory strategies

• Physical inspections (stocktakes) ensure inventory levels match records
• Security systems (cameras, tags) prevent theft
• Suitable transportation and storage prevent damage
• Limiting staff access with locks ensures controlled storage, for security
• Purchasing enough inventory to satisfy anticipated sales helps you avoid shortages
• Keeping accurate records ensures you know stock situations

Control of Current Liabilities

• Current liabilities are financial commitments due in the short term
• Minimizing costs related to current liabilities is an important part of managing working capital

Accounts Payable

• Payables are sums of money owed to other businesses for purchased goods and services
• Businesses must monitor payables to maintain adequate cash resources

Managing Accounts Payable

• Taking advantage of discounts from early payments or bulk buying lowers expense
• Repaying within interest-free credit periods avoids interest charges
• Negotiating extended payment reduces immediate cash needs

Short-Term Loans

• Short-term loans have costs for establishment, interest rates and ongoing charges
• Short-term loans can be expensive do to the shorter term in their contract

Overdrafts

• Overdrafts are short-term borrowings that alleviate temporary cash shortages
• Banks charge account-keeping fees, establishment fees, and approximately 14% interest
• Businesses should manage overdrafts and monitor budgets to control cash supplies

Leasing as a Strategy for Managing Working Capital

• Leasing allows a lessee to use an asset owned by the lessor in exchange for rent payments over a leasing contract

Operating Lease

• With an operating lease, the lessor retains ownership and bears risks and rewards related to the asset
• The lessee does not have a purchase option for the leased asset
• The lessor bears the expenses borne for the product
• The lessee has no running or administration costs
• No tax depreciation can be claimed

Financial Lease

• With a financial lease, there is a transfer option at the end of the lease period with the lessee
• The risk is with the lessee
• The lessee may have an option to purchase product

Leasing Alternatives

• With leasing, cash outflow spreads over years, while outright purchase involves one-off initial outflow
• Leasing gives the opportunity to use quality assets, while outright purchase may not be as affordable -Lease payments are operating expenses and tax deductible, while with out right the assets can have depreciation
• Leasing provides flexibility to upgrade, while purchased assets are kept until obsolete
• With Leasing less expense on repairs and maintenance while there is maintenance with purchasing
• Lease payments help with cash flow as they can be budgeted, while outright purchase involves a big cash outflow

Strategies: Sale and Lease-Back

• A business sells a non-current asset, providing a cash injection for expenses

Profitability Management

• Profitability indicates a business's financial success
• Effective profitability management controls costs and revenue
• Profit equals revenue minus expenses

Cost Controls

• Costs are categorized as fixed or variable
• Cost controls assess the impact of cost on profit
• Businesses can boost profits by cutting variable costs in labor and/or inputs

Fixed Costs

• Fixed Costs are not dependent on the level of operating activity in a business

Variable Costs

• Variable Costs are have a direct relationship with the level of activity and change as output and sales

Cutting Variable Costs

• Negotiating discounts with suppliers is a strategy to cut costs
• Reducing the number of suppliers also decreases cost
• Reducing staff and multi skilling is a strategy to cut costs
• Increasing self-servicing by customers is a strategy to cut costs
• Sharing cost of resources with other business is a strategy to cut costs
• Replacing full-time staff with casual staff saves on entitlements

Examples of fixed and variable costs

• Loan repayments, salaries, insurance, and rent are example of fixed costs
• Utilities (electricity and gas), phones, raw materials, delivery charges, petrol, and labor wages are examples of variable costs

Cost Centres

• Divisions within a business create cost centres in order to account for their expenses
• Cost centres allow for more control of total costs

Expense Minimisation

• Guidelines and strategy should be established to encourage staff to minimise expenses wherever possible
• Guidelines have substancial meaning especially when cost centre are used effectively to determine the type of expense that contributes most to the product.

IKEA Cost Cutting

• IKEA's designs are simple created with low cost materials
• Long term supplier partnership enables advantageous discounted bulk buying
• All products packaged efficiently
• IKEA is located in cheaper (rent/land) more distant places eg. Marsden Park in 2013.
• Production is limited in numbers but mass produced to achieve economies of scale (optimal level of sale/COGS)

Revenue Controls

• Revenue is the income a business receives during a specific time period
• Revenues must take discounts and returned sales items into account
• Acceptable revenue levels should consider marketing objectives

Marketing Objectives

• Marketing objectives aim for increased sales and revenue
• Revenue control considers sales forecasts, sales mix, and pricing

Sales Forecast

Future sales estimates is on sales fore cast based on all of these factors

• The sales forecast is used to predict future sales which is based on all factors
• Patterns of sales in previous years
• Performance of marketing strategies
• Economic conditions Level of competition
• Stage in the product's life cycle

Sales mix

• The combination of different products and services that make up the total sales of a business
• Sales reporting would demonstrate what marketing strategy is efficient and effective

Pricing Policy

• Factors influence pricing are:
• Direct materials, direct labor, overhead
• Competition, Short& Long term goals, Quality level, Government policies

Global Financial Management

• Opening up financial expansion opportunities, it is exposed to financial risk

Financial Markets

• The share or equity market: where ownership shares in companies are issued or exchanged
• The debt market where debt securities (such as bonds) are exchanged, or cash is lent and borrowed
• The derivatives market where people buy and sell financial assets that are based on the value of other financial assets
• The foreign exchange market where financial assets defined in one country's currency are exchanged for assets defined in another country's currency.

Exchange Rates

• The foreign exchange market (forex) mediates trade and financial relationships between countries
• The exchange rate is the ratio of one currency to another
• It is determined by the supply and demand of respective currencies

Currency Fluctuations

• Currency appreciation boosts exports and boosts imports
• Currency depreciation boosts exports and lowers imports

Market Risks

• Hedging Risk, Risk Minimisation & Speculate risk
• There is Equity Risk, interest risk, currency risk, commodity risk,

Interest Rates

• Interest rates bring about equilibrium in a financial market
• Equilibrium is the condition to where the quantity of funds supplied by lenders = that of the borrowers are demanding
• Lenders will tend to offer more quantity as interest rate increase + Borrowers will borrow more funds as interest rates decrease
• The official cash rate is an overnight interest rate used to charge to borrow funds in the cash market
• The overnight money market is for very short loans between banks, very short term

International Payments

• Payment is complicated by; language barrier, different jurisdictions & trust issues. A 3rd party is generally sought when discussing arrangements
• One important aspect is to select appropriate method of payment

International Payment Risks

• Payment in advance is the most safest in risk for the exporter + Low in risk for importer
• Clean payment, Low in risk for exporter + High in risk for importer
• Bill of exchange + Letter of credit = Medium risk

Payment in Advance

• It is the most secure method of payment
• Least desired option for the importer as it has the risk of goods never being sent

Letter of Credit

• A bank issues document to; seller/exporter that pay on presentation of shipment Documentation

Bills of Exchange

• It is a written order from seller; requesting the importer has pay a specified timeline amount. This will be bank to ensure they are pay.

Clean Payment

• Documentation is handled directly, ship before payment is received as there is a lot of trust

Hedging

• is a strategy to reduce the risk of ; loss from Converting from currency to another
• Spot Exchange is the value in which one country currency is to another

Hedging Strategies

• Natural Hedging helps with financial management
• Financial Instrument Hedging (derivatives product): helps minimize or spread the risk of exchange. There are a few as such;
• Forward exchange contract: is when Banks guarantee a agreed exchange rate to export +Importer knows accurate cost and revenue can do better
• Option Contract: This is when Business has the option to buy or sell foreign currency + protects option holder
• Swap Contact: Allows for to Businesses to use exchange, agreement are reversed for transaciton

Explore key business and finance concepts. Test your understanding of working capital, liquidity, and financial strategies. Learn about accounts receivable, payment terms, and short-term financing options.