Nature_of_Business

Effective cash flow management Cash flow statements • Cash flow – the movement of cash in and out of a business over a period of time. • Statements: indicates the movement of cash receipts and cash payments resulting from transactions. • Gives information regarding a firm’s ability to pay its debts on time and indicates: • Whether financial payments can be made as they fall due. • Whether there are sufficient funds for future expansion or change. • If finance can be obtained from external sources when needed. • If there are enough funds to pay dividends to shareholders. Operating flows • Directly associated with making and selling products or services. • Inflows from main operations, and outflows to suppliers, employees and insurance/ rent/ advertising. Investment flows • Associated with purchase and sale of long term assets. Financing flows • Associated with debt and equity financing transactions. • Include borrowing inflows and cash outflows relating to repayments of debt or dividend payments. Management strategies Distribution of payments • Cash flow projection can assist in identifying periods of potential shortfalls and surpluses. • Timing of purchases and investments; should be matched to time when cash is available. Discounts for early payments • Cash discount – a percentage deduction from the purchase price if the buyer pays within a specified time shorter than the credit period. • Encourages earlier payment, and improves cash flows. Effective profitability management Cost control Fixed and variable costs • Fixed costs – unaffected by the level of operating activity in a business; must be paid regardless of profits. • Variable costs – incurred in proportion to the output of a particular good or service. • Strategies to reduce variable costs: • Reducing workforce, increase productivity by multi-skilling employees. • JIT inventory system. • Substitute variable for more fixed costs. Cost centres • Particular units (departments or sections) of a business to which costs can be directly attributed. Expense minimisation • Downsizing, reducing fixed expenses in times of strong competition or recession. • Expense budget. Revenue control • Revenue: money received from operating, financial and investment activities. Sales objectives • Set out in revenue budget, they are a forecast of future sales. • Level of expected sales must cover costs, both fixed and variable, and result in a profit. • Cost-volume-profit analysis – determines level of revenue sufficient to cover costs to break even. Sales mix • Mix of products a business offers to sale. • Controlled by analysing the contribution margin for each product. Pricing policy • Factors: costs associated with producing the product, competition prices, short-term and long-term goals, and government policies. • Determining the price for each product that will maintain or improve market share, at the same time meeting profitability objectives. • Ethical and legal aspects Audited accounts, inappropriate cut-off periods and misuse of funds Audited accounts • Audit: independent check of the accuracy (truth and fairness) of financial records and accounting procedures. • External audits: a business’s financial reports must be investigated by independent audit accountants. They look for things such as inappropriate cut-off periods and misuse of funds. Inappropriate cut-off periods • Profits need to be matched with the costs and revenues that generated it. • It is possible to create a false profitability position by choosing a cut-off period where significant revenues are separated from the costs associated with them. Misuse of funds • Control system would restrict the ability of people to misuse funds; measures include computer passwords, requirement of multiple signatures or certain types of expenditures. • Make detection of errors more likely by regularly doing physical checks of things such as inventory levels. • Introduce penalties. Australian Securities and Investments Commission • Independent government body that enforces and administers corporations law and protects consumers in areas of superannuation, insurance and banking. • Purpose: to reduce fraud and unfair practices in financial markets and financial products. • Ensure companies adhere to the law. • Market integrity regulation – promoting market development by protecting participants from fraud. • Consumer protection – ensure investors have adequate information, are treated fairly and have avenues for redress. Corporate raiders and asset stripping • Corporate raiders used borrowed funds to buy underperforming companies. • Asset stripping is the process of buying companies in order to sell, at market value, assets that are undervalued on the balance sheet. • Poorly managed companies more likely to be victims of these practices.