Nature of Business
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- Category: Politics: Economics
- Date Submitted: 03/20/2011 02:22 AM
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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...
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...