financial management

Working capital management

Funds available for short-term financial commitments of a business (wages, rent, purchases)

includes control of current assets— cash recievables, inventories
control of current liabilities — payables, loans, overdraft

Control of current assets— cash, receivables, inventories

1. Cash → important to have on hand for cash flow 

2. Accounts receivable → must manage collecting and timing AR in order to prevent cash shortfall; strategies to manage AR; 

   1. Check credit of customers

   2. Debt collection policies

   3. Follow up on accounts overdue

3. Inventories→ managing stock to ensure cash sales, must ensure inventory turnover is sufficient to generate cash sales

   1. JIT, FIFO, LIFO

Control of current liabilities— Payables, loans, overdrafts

1. Account payable → must incur accounts are paid in a timely fashion in order to avoid extra payments:

   1. Pay CL as late as possible end of (30 day period)

   2. Pay early to take advantage of discounts

   3. Take advantage of interest free periods

2. Loans → short-term loans can provide cash during shortfalls

   1. Must ensure terms and interest rates are appropriate for the loan purpose

3. Overdraft → short-term solution to cash shortfalls

   1. Facility attached to business account allow for short term withdrawals beyond balance of the account

   2. Typically a maximum of $5-10k

Strategies— leasing, sale, leaseback

1. Leasing→ used for larger assets

   1. Prevents large outputs of cash for assets

   2. Minimised maintenance cost

• Qantas has leased more aircraft, building and plant equipment in order to free up more cash 

• Debt market trends, tax depreciation, deterioration in aircraft residual rates and the need to provide greater flexibility has increased the attractiveness of leasing 

• Leasing also avoid being tied to idle assets during downturns like COVID where travel restrictions were in place

Sales and Lease Back (s&lb)

• Qantas was previously one of the few airlines to own its own terminals, thus since 2014 has taken advantage of s&lb of its terminals to boost working capital 

  • Brisbane sold for $112Mn (2014), Sydney terminal sold back to airpor for $535Mn (2015), domestic terminal in Melb sold back to airpur for $355Mn 

Hedge

A ’hedge’ is any process which minimises the risk associated with international trade (exchange rates, interest rates, costs of resources)

- A hedge can be thought of as a type of insurance. A premium is paid to protect a company from a negative outcome.

- Hedging is normally done using complex financial instruments known as derivatives.

Natural Hedging:

A business may structure itself to provide a series of ‘natural’ hedges.

- Stockpile profits in a foreign currency → E.g. QANTAS can keep USD to pay for fuel (hedged 90% of its fuel needs for 2021 with significant participation to

falling fuel prices)

- Diversify the business → e.g. QANTAS could purchase part of an oil company