Financial Strategies Available To Manage Cash Flow
Financial management refers to the strategic planning, organising, directing, and controlling of the financial resources of a business to achieve the set goals of the business. The key objectives of financial management include: profitability, liquidity, efficiency, growth, and solvency, with the overall objective of financial management being the maximisation of the return on investment for the business owners, while also achieving financial goals in terms of profits, growth and stability. In order to achieve these financial goals, financial managers hold a number of financial strategies available, these include: cash flow management strategies, working capital management strategies, and profitability management strategies. As such, the ability to manage financial resources effectively will significantly contribute to the profit, return on investment, growth and expansion of a business, with effective financial management a critical success factor for a business, as specifically demonstrated by Qantas and its ability to manage cash and maintain profitability.
Cash flow management is the process in which a business monitors its cash inflows and outflows, with cash flow specifically referring to the cyclical flow of cash in and out of a business. As a result, if there are more cash outflows than inflows, then a cash flow problem exists, and a business may not be able to repay debts, potentially leading to bankruptcy, or the liquidation of business assets. Consequently, there are three types of cash flows that a business is required to monitor, with these including: operational flows, which relate to producing and selling the output of the business, investment flows, which relate to the buying and selling of non-current assets, and financial flows, which relates to the flows of cash associated with debt and equity financing. In turn, there are several key tools available to assist businesses in managing and predicting their future cash flows and potential influxes or shortages of cash, these being cash flow statements and budgets. The cash flow statement is a forecast of monthly cash inflows and outflows, its importance comes about due to the fact that cash flow statements allow managers to predict and account for periods of time in which the business may have an abundance or shortage of cash, and therefore take corrective action.
Two main financial management strategies are used by businesses to effectively manage cash flow. These are the distribution of payments, discounts for early payments, and factoring. In relation to the distribution of payments, the money coming into the business will not evenly match payments due from the business. As such financial managers, especially at Qantas, need to understand and be able to analyse the trends relating to cash inflows and outflows to ensure that business payments are linked to periods of higher cash outflow. For Qantas and other businesses that receive regular and stable cash inflows, it is desirable to spread payments evenly throughout the year. Making regular monthly repayments rather than large lump sum payments reduces the chance of cash shortages during vital periods of the year, hence highlighting the importance of effective cash flow management. An example of this distribution of payments will most likely occur within Qantas in the form of insurance and telephone bills, which would be split from annual instalments into monthly instalments. Furthermore, as a result of this strategy, businesses will have more cash readily available, and be able to more appropriately react to unexpected costs and increasing variable costs, most notably the rising cost of fuel.
The next cash flow management strategy is that of discounts for early payments. As such, discounts are reductions in price of the good or service if payment is made earlier than required, as such businesses can offer discounts for cash and early payments. This is turn has been demonstrated by Qantas and other airlines through their “early bird” sales , which offer significantly cheaper fares for flights booked up to six months in advance, along with a Qantas spokesman’s comments stating, “the earlier you book, the cheaper the flight”. As such, offering discounts for early payments encourage quicker payments from customers and debtors through the incentive of price reductions, consequently, Qantas and other businesses are provided with readily accessible sources of cash, therefore leading to an improved cash flow situation that can be used to further invest in the business. Although offering discounts for early payments may provide businesses with an early source of cash, through offering the discounts, businesses may indirectly end up reducing their revenue and their profitability, potentially leading to poor cash flow in the future. Despite this fact, offering discounts for early payments is a better strategy than late fees due to the fact that discounts offer and encourage a positive working relationship with customers that in turn, could result in a positive customer perception, therefore helping to increase revenue through earlier access to funding, although late fees may become necessary to prevent debtors from stretching their overdue payments beyond the due date on a regular basis.
Working capital is the difference between the current assets and the current liabilities of a business. As such, the current ratio for Qantas is 41 cents of assets for every $1 of debt as of December 2018. This in turn places Qantas at risk of becoming unable to repay its debts, hence illustrating the need for effective cash flow, and in turn the implementation of working capital management strategies. Relating to the control of current assets in the forms of cash, receivables and inventories, Qantas holds minimal amounts of cash but maintains emergency standby facilities, holding amounts up to $300 million, to draw on cash when required to pay its creditors. However, in terms of controlling accounts receivables, as previously stated, Qantas encourages its customers to book flights early through offering discounts. Furthermore, through the Frequent Flyer program, Qantas is able to achieve funding through its arrangement with banks, which are required to pre-pay for the rights to issue their customers with Frequent Flyer deals on credit cards, to which Qantas records theses Frequent Flyer points as a liability until they are redeemed, at which point they are then registered as income, therefore acting as a tax minimisation and cash flow generation scheme for Qantas. The final strategy relating to the control of current assets is that of inventory management, to which effective inventory control allows a business to keep costs low, as excess levels of stock held in storage will ultimately lead to cash flow issues and shortages, while a shortage of high-demand stock will also lead to losses through the minimisation of business revenue. As such, to minimise the losses incurred at Qantas as a result of perishable and non-perishable stock, Qantas has implemented an automated just in time inventory management system, which will automatically order stock once levels drop below a certain amount, therefore always ensuring that an adequate level of emergency stock remains to allow for consistent revenue to be generated. If effective cash flow was not present at Qantas then the business would be unable to order this stock once levels dropped below critical levels, therefore meaning that the business would lose revenue, and create even more of a cash flow issue.
Managing short term liabilities is critical factor in regard to the success of a business in effectively managing cash flow, as a business must be able to pay these short-term debts in order to maintain a healthy level of liquidity within the business. As such, businesses will need to manage loans, accounts payable, and overdrafts in order to meet short-term financial obligations. In relation to loans, Qantas holds a negative working capital position, meaning that loans and trade credit are major sources of finance for the business in order to meet its obligations to both its customers and suppliers. As such, interest and loan repayments to the business’ creditors must be repaid by the due date. Subsequently, the issues that occur when a business fails to meet its loan obligations can be serious, resulting in an inability to secure future loans through a poor credit rating, or even the closure of the business or the liquidation of business assets to recover costs. Here, the importance of the cash flow statement is especially notable due to its ability to assist businesses in controlling loan payments effectively, and in turn allowing businesses to plan to have sufficient cash in order to meet these required repayments.
The next short-term liability related to working capital is that of bank overdrafts, which can be effective in managing working capital through the fact that these short-term loans allow businesses to continue to pay their accounts and short-term debts even in the event of cash shortages. The offset of this loan however, is that interest is paid on the outstanding overdraft balance, and banks can request for outstanding overdraft payments be paid immediately in full where overdrafts consistently exceed agreed limits, terms and conditions. It is therefore imperative that businesses adhere to the strict conditions relating to overdrafts, and when engaging in overdraft engagements, businesses practise efficient cash flow management to minimise the risk of closure or further financial burden arising from high interest in relation to bank overdrafts. The final short-term liability is that of accounts payable, which are the amounts a business owes to other businesses that need to be paid in a relatively short period of time. This is referred to as trade credit, and different suppliers will have different terms and conditions, such strategies that Qantas employs to control payables include: paying on time to avoid late fees, taking advantage of early payment discounts, and maintaining a good credit rating to ensure that credit is extended to the business in the future. Ultimately, accounts payable must be paid on time to ensure that the business maintains an effective working relationship with its creditors and is able to maintain a stable cash flow, while also minimising the risk of repossession of assets, and ultimately the closure of the business.
In addition to controlling current assets and liabilities, there are two other strategies that a business may employ to manage its working capital and ultimately increase cash flow. The first is leasing, which is a financial arrangement that allows a business to use an asset in return for payment over a set time period. As of the 2018 financial year, Qantas was leasing forty-two aircraft, which in turn has allowed the business to retain more working capital for it to invest in other business ventures and expansion. As such, the advantage of leasing is that the cost is lower than the actual purchase of the asset, is tax deductible, and with some leases the business does not have to maintain the asset, and the asset can be continually updated. Furthermore, in relation to Qantas, leasing offers Qantas greater flexibility as newer fleet aircraft such as the Boeing 787 Dreamliner emerge, allowing Qantas to cancel its leases on older, more expensive to operate aircraft such as the Boeing 747, therefore provider greater versatility in the operation of the business’ fleet. The one disadvantage of leasing however is that the business leasing does not own the asset at the end of the leasing agreement. The other strategy involved with working capital is sale and lease back, which involves the selling of assets such as buildings and equipment and then leasing these assets back from the buyer. This allows a business to raise finance quickly without incurring any new debts, and the advantage of this in relation to working capital is that the business has sold an asset and received cash in return allowing for immediate investment back into the business. Furthermore, the business will only have to pay a fraction of the value of the asset to lease it back from the buyer, consequently freeing up large amounts of capital for further business investment purposes. As such, this has been demonstrated by Qantas through the fact that Qantas is one of the few airlines in the world to own its own airport terminals, and in 2016 sod Sydney Airport Terminal 3 for $185 million in immediate cash, therefore increasing the overall cash amount available to the business and also increasing cash flow in the wake of economic turmoil in the face of issues such as rising oil prices.
Profitability is the ability to make a financial return from business activities, and as such, can be calculated as the difference between revenue and expenses. In order to maximise profits, businesses need to both keep expenses and costs under control and increase revenue. As such, Qantas has implemented financial strategies such as cost controls and revenue controls to help maintain profitability. With relation to cost controls, fixed and variable costs pose a significant issue to cash flow, especially variable costs, which hold a potential to increase dramatically given volatile market conditions. As such, to minimise the effect of variable costs on the liquidity of the business, Qantas has engaged in fuel hedging to mitigate the effects of expected fuel price rises in the future, especially given that fuel is one of the largest expenses on the Qantas balance sheet, with an expected cost for the 2018/19 financial year for $4 billion. As such, Qantas is involved in a call option hedge for fuel, which allows the company to purchase fuel at a specific price within a specific time frame. This has been especially effective in protecting the cash flow of Qantas through providing stability and protection against the rising cost of fuel, therefore allowing for accurate analysis of expected fuel expenses.
Another cost control implemented, has been that of the introduction of cost centres within the Qantas business structure. This is where businesses attempt to control costs by allocating a proportion of total costs to particular parts of the business, these cost centres are then held accountable for the costs that they incur. Consequently, this allows a business to review the spending of each cost centre, and where appropriate, to cut costs by reducing a cost centre’s allocated funds. As such, Qantas has split itself into separate cost centres including: Qantas International, Qantas Domestic, Jetstar, Qantas Loyalty, and Corporate, which ultimately grants greater clarity in terms of the fact that through cost centres, Qantas can accurately determine which departments are costing the business the most, and where investment is required to increase productivity, efficiency, and ultimately profitability, therefore acting as a means for greater monitoring and controlling of cash flow, ultimately allowing for a quicker response time for corrective action.
The final cost control related to profitability management is that of expense minimisation, which relates to the reduction of costs and expenses in order to maximise profits and gain a competitive advantage through achieving more cash available to invest back within the business. A wide range of strategies can be used to minimise costs and expenses, such as outsourcing, which involves a business contracting work to outside businesses, with Qantas outsourcing functions such as maintenance, IT, and catering in return for cash injections of millions of dollars, helping to ultimately improve cash flow, while also reducing costs through not having to maintain unnecessary business activities, thus increasing the efficient use of resources. Furthermore, to minimise expenses, businesses may choose to review and reform their workplace relations practices, minimise costs through the casualisation or automation of the workforce, the restructuring of business departments and redundancies, and finally through entering strategic alliances with other competitors, as Qantas has with relation to American Airlines, China Eastern and Emirates. This in turn has ensured that Qantas has minimised competition, thus reducing the threat of external influences, while also widening its access to international markets such as China and the Middle East, also potentially allowing the business to access greater levels of innovation within the airline industry though this coordination. Ultimately, through cost control strategies, Qantas has saved over $8 billion in the last 15 years, which has been reinvested back into the business. As such, without proper cash flow management, especially during the 2014 dramatic drop in profitability, Qantas may have ended up bankrupt and unable to repay its debts, thus highlighting the need for effective cash flow and the minimisation of business expenses.
Revenue controls also fall under profitability management and are designed to ensure that there is income flowing into the business in the form of revenue on a regular basis, and once this objective has been achieved, revenue controls aim to increase revenue and to therefore increase profit levels. These revenue controls can be achieved through the marketing objectives of sales objectives, the sales mix, and the pricing policy. As such, sales objectives are the interdependent link between the marketing plan and the financial plan. Consequently, sales targets are set to maximise sales, to increase the turnover of stock, and ultimately, to maximise the revenue received by the business. Understanding the desires of the consumer is a vital aspect of setting down appropriate sales objectives, a key sales objective of Qantas, or any other business will be to maximise market share in order to increase sales, thus leading to increased profit, one of the key indicators of financial success and effective cash flow management. Furthermore, to reach sales objectives, businesses may also engage in more effective and improved marketing strategies to achieve both marketing and financial objectives, as has been demonstrated by Qantas, especially in relation to the new international business class option offered to passengers, the introduction of self-serve kiosks, next generation check ins, and the new advertising campaign and use of loyalty programs. Ultimately, the effectiveness of these strategies has been demonstrated by the consistently increasing trend demonstrated by the Qantas Revenue Seat Factor ratio, which has consistently increased from 77% in 2014 to 83% in 2018, therefore indicating that through sales objectives Qantas has increased the revenue through the marketing strategy and therefore increased the number of passengers flying on each Qantas plane. Other financial management strategies related to revenue controls Qantas has implemented relate to both the sales mix and the pricing policy, with Qantas aiming for a broad sales mix, with services that hold the greatest profit margins and growth potential. Outsourcing and selling off business service that do not hold this same potential, as seen with Qantas Defence Services, and the business’ catering arm has helped to narrow a very broad service focus that was minimising resource efficiency within the business through unnecessary maintenance and related expenses, through narrowing the services offered by the business, Qantas has both injected a large amount of cash back into the business through selling off these unnecessary business arms, and minimised the risk to the business because of the variety of services offered.
In conclusion, it is evident that effective cash flow management is highly important in ensuring that business hold funds available to both fund business expansion and maintain the day to day operations of said business. Without proper cash flow management, it is evident that businesses will ultimately be unable to repay both short-term and long-term debts. Furthermore, without maintaining adequate cash flow management strategies, businesses will be unable to maintain necessary day to day functions, therefore resulting in the business becoming unable to raise the funds necessary for conducting such activities necessary as paying the wages of employees, the purchase of necessary stock, and the investment in future equipment and expansion needs of the business. As such, the necessary financial strategies available to manage cash flow include: cash flow management strategies, work capital management strategies, and finally profitability management strategies, all these strategies have ultimately been implemented by Qantas and the effectiveness of these strategies has been demonstrated through the profitability of Qantas.