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...