Finance Part 2

What are financial management strategies?

Actions used to achieve financial objectives and improve business performance.

What are the main financial management strategies?

Cash flow management, working capital management, profitability management, cost control, debt and equity financing, and dividend management.

What is cash flow management?

The process of monitoring and controlling the movement of cash into and out of the business.

Why is cash flow management important?

It ensures the business can meet its financial obligations and remain liquid.

What strategies improve cash flow?

Speed up receivables, delay payables where appropriate, manage inventory, prepare cash flow forecasts and reduce unnecessary expenses.

What is working capital management?

The management of current assets and current liabilities to ensure sufficient liquidity.

Why is working capital management important?

It ensures the business can fund its day-to-day operations efficiently.

How can businesses improve working capital?

Improve inventory control, collect debts faster, negotiate longer payment terms and maintain adequate cash reserves.

What is profitability management?

Strategies used to increase profits through higher revenue or lower costs.

How can businesses improve profitability?

Increase sales, reduce expenses, improve productivity and eliminate waste.

What is cost control?

Monitoring and reducing business expenses without sacrificing quality.

Examples of cost control strategies?

Budgeting, outsourcing, automation, reducing waste and negotiating with suppliers.

What is debt financing?

Raising funds through borrowing.

When is debt financing appropriate?

When expected returns exceed borrowing costs and the business can comfortably repay debt.

What is equity financing?

Raising funds by selling ownership shares.

When is equity financing appropriate?

When a business wants to avoid excessive debt or requires large amounts of capital.

What is dividend management?

Deciding how much profit is distributed to shareholders and how much is retained.

Why are retained profits important?

They provide internal finance for future growth without increasing debt.

Why do businesses pay dividends?

To reward shareholders and attract future investors.

What is liquidity management?

Ensuring sufficient cash is available to meet short-term obligations.

How can liquidity be improved?

Increase cash reserves, reduce unnecessary inventory and improve debtor collection.

What is inventory management?

Controlling stock levels to minimise costs while meeting customer demand.

Why is inventory management important?

It reduces holding costs and improves cash flow.

What is accounts receivable management?

Managing customer debts to ensure timely payment.

How can receivables be managed effectively?

Credit checks, clear payment terms, reminders and discounts for early payment.

What is accounts payable management?

Managing payments to suppliers efficiently.

How can payables be managed effectively?

Pay on time while taking advantage of full credit periods.

What is financial planning?

Setting financial goals and developing strategies to achieve them.

Why are financial forecasts important?

They help businesses prepare for future opportunities and risks.

What is a financial report?

A document showing a business's financial performance and position.

What is the income statement?

A financial report showing revenue, expenses and profit over a period.

What is the balance sheet?

A statement showing assets, liabilities and owner's equity at a point in time.

What is the statement of cash flows?

A report showing cash inflows and outflows from operating, investing and financing activities.

How is financial management effectiveness measured?

By analysing financial ratios, achieving objectives and comparing performance over time.

What are financial ratios?

Mathematical comparisons used to assess business performance.

What are the four categories of financial ratios?

Liquidity, profitability, efficiency and gearing.

What does ratio analysis allow businesses to do?

Evaluate strengths, weaknesses and financial trends.

What is the current ratio?

A liquidity ratio measuring the ability to pay short-term debts.

Current ratio formula?

Current Assets ÷ Current Liabilities

What is the ideal current ratio?

Approximately 2:1.

What does a current ratio below 1 indicate?

The business may struggle to meet short-term obligations.

What is the quick ratio (acid test)?

A liquidity ratio excluding inventory from current assets.

Quick ratio formula?

(Current Assets − Inventory) ÷ Current Liabilities

What is the ideal quick ratio?

Approximately 1:1.

Why is inventory excluded from the quick ratio?

Inventory may not be converted into cash quickly.

What is the gross profit ratio?

A profitability ratio measuring gross profit as a percentage of sales.

Gross profit ratio formula?

Gross Profit ÷ Sales × 100

What does a high gross profit ratio indicate?

Strong pricing or effective cost of goods sold management.

What is the net profit ratio?

A profitability ratio measuring net profit as a percentage of sales.

Net profit ratio formula?

Net Profit ÷ Sales × 100

Why is the net profit ratio important?

It measures the overall profitability of the business.

What is the expense ratio?

A profitability ratio measuring expenses as a percentage of sales.

Expense ratio formula?

Expenses ÷ Sales × 100

What does a lower expense ratio indicate?

Better cost control.

What is return on equity (ROE)?

A profitability ratio measuring returns earned for shareholders.

Return on equity formula?

Net Profit ÷ Owner's Equity × 100

Why is return on equity important?

It measures how effectively shareholder funds generate profit.

What is the accounts receivable turnover ratio?

An efficiency ratio measuring how quickly debts are collected.

Accounts receivable turnover formula?

Credit Sales ÷ Accounts Receivable

What does a higher receivable turnover indicate?

Faster collection of customer debts.

What is the accounts payable turnover ratio?

An efficiency ratio measuring how quickly suppliers are paid.

Accounts payable turnover formula?

Credit Purchases ÷ Accounts Payable

What is the inventory turnover ratio?

An efficiency ratio measuring how quickly inventory is sold.

Inventory turnover formula?

Cost of Goods Sold ÷ Average Inventory

What does a high inventory turnover indicate?

Efficient inventory management.

What is the gearing ratio?

A ratio measuring the proportion of debt financing.

Gearing ratio formula?

Total Liabilities ÷ Owner's Equity

What does high gearing indicate?

Higher financial risk due to greater reliance on debt.

Advantages of high gearing?

Can increase returns to shareholders when profits exceed interest costs.

Disadvantages of high gearing?

Higher interest obligations and greater financial risk.

What is horizontal analysis?

Comparing financial results over multiple time periods.

What is vertical analysis?

Comparing financial statement items as percentages within one period.

What is benchmarking?

Comparing financial performance against competitors or industry averages.

Why is benchmarking useful?

It identifies areas requiring improvement.

What is variance analysis?

Comparing actual results with budgeted figures.

What is a favourable variance?

Actual results are better than budgeted.

What is an unfavourable variance?

Actual results are worse than budgeted.

What are the limitations of ratio analysis?

Ratios rely on historical data, accounting methods differ and external factors may distort comparisons.

Why should ratios be compared over time?

To identify trends in business performance.

Why should ratios be compared with competitors?

To assess relative performance within the industry.

How does effective financial management contribute to business success?

It improves profitability, liquidity, efficiency, solvency and long-term growth.

What financial objective focuses on meeting short-term debts?

Liquidity.

What financial objective focuses on long-term survival?

Solvency.

What financial objective focuses on generating returns?

Profitability.

What financial objective focuses on using resources well?

Efficiency.

What financial objective focuses on increasing business size?

Growth.

What financial objective focuses on investor wealth?

Maximising shareholder value.