As the strategic role of financial management is to provide adequate financial resources to achieve
financial objectives such as profit and growth, maintaining cash flow and profitability is essential to a
business. Strategies such as discounts for early payments and factoring can assist in generating cash
flow, whereas cost controls and revenue controls can assist in improving profitability. Through
contemporary businesses such as Qantas, Apple and Woolworths, it is evident that the effective use
of these strategies largely assists in effective financial management.
Providing discounts for early payments is an effective strategy to maintain a business’s cash flow.
Maintaining cash flow is extremely significant, as management must ensure that cash is available to
make payments when they are due, otherwise they will fail to achieve the financial objective of
liquidity. The discounts for early payments strategy involves giving debtors a discount if they provide
their payments within a specified date. This accelerates the rate of cash coming into the business,
and reduces the risk of late payment, hence improving solvency. HPM Electrical utilises this strategy
and offers big customers like Bunnings a 2% discount for payment within 10 days on its usual 30-day
credit terms. This strategy has proved to be extremely successful for the business, with annual cash
flow improvements of $37, 000, hence improving their liquidity and solvency. The strategy has also
been effective for McDonald’s Germany, with data showing that it now takes them only 7 days to
process their invoices, instead of the 20 days it took previously, hence significantly improving cash
flow status. However, the limitation of this strategy is that businesses receive less money from
debtors, which may hinder the financial objective of profitability. Thus, providing discounts is
effective in improving cash flow, but may hinder profitability.
Factoring is also another reasonably effective strategy in maintaining a business’s cash flow.
Factoring is the selling of accounts receivables for a discounted price to a finance or specialist
factoring company. This is extremely effective in generating instant cash flow as businesses can
receive 90% of the amount of receivables within 48 hours of submitting its invoices to a factoring
company. Harvey Norman uses factoring for its 3 years interest free sales, from a financial institution
known as GE Finance. GE Finance purchases the debt at a reduced rate and pays Harvey Norman
instantly for the funds owed, which generates increased cash flow for the business and allows it to
focus on its core business rather than following up debt. However, factoring also may hinder the
financial objective of profitability, as it is a relatively expensive strategy with large amounts of
commission. Furthermore, depending on the conditions of the factoring firm/institution, the
business may be responsible for any unpaid debts, which would also significantly increase expenses.
Thus, factoring is effective in generating instant cash flow, but may restrict profitability.
The use of cost controls by a business can significantly assist in improving profitability. A particular
strategy relating to cost controls is the use of cost centres, which are particular departments of a
business to which costs can be directly attributed. This helps to manage costs and sustain
profitability as management knows particularly where expenses are being incurred. Qantas
effectively does this by aligning their business into separate segments such as Qantas International
and Jetstar to efficiently allocate expenses and achieve the objectives of profitability and efficiency.
This, along with other strategies such as entering strategic alliances has enabled Qantas to reduce
overall costs by 20% in the past 5 years. Cost controls can also be done through expense
minimisation, which involves the most cost-effective way of delivering goods and services.
Woolworths has effectively minimised expenses recently through a decrease in traditional
promotions and advertising, as well as self-serve checkouts, thus decreasing costs and enabling for
the achievement of profitability and efficiency. Hence, cost controls are extremely effective in
improving a business’s profitability.
To improve profitability, businesses should also consider the efficient strategy of using revenue
controls. To determine an acceptable level of revenue that achieves profit maximisation, financial
management must have a clear idea about their marketing objectives such as pricing policies and
sales objectives. For instance, prices of competing products can be closely monitored to determine
an effective pricing policy mix that will maximise business revenue. This was done by Apple, where
an increase in the average selling price of iPhones in recent years has allowed Apple to experience
increased profitability despite the plateau in units sold since 2015. Apple has also modified its
marketing mix to suit the preferences of consumers in India, a primary target market for Apple. As
Apple’s newest products are too expensive for the average Indian consumer, Apple has marketed
older models such as the iPhone 7 to increase market share against competing businesses such as
Oppo and Vivo and enable Apple to effectively increase revenue. Likewise, Woolworths targets its
primary market through marketing objectives such as the ‘Lower Prices Always Campaign’, and their
‘Everyday Rewards Card’ enabling them to increase revenue from increased demand, and hence
improve profitability. Thus, revenue controls are an extremely effective strategy to improve a
business’s profitability.
Hence, discounts for early payments and factoring are effective in generating cash flow but may
restrain profitability. Using cost controls and revenue controls are extremely effective in improving
profitability. As exemplified through the case studies, the effective use of these strategies
undoubtedly improves a business’s financial position.