Managing Cash Flashcards
What is a cash budget?
Detailed forecast of expected cash receipts, payments and cash balances over the planning period
What are the three primary benefits of holding cash?
- Transactions motives: to make purchases and pay for expenses
- Precautionary motive: for unseen spending, just in case
- Speculative motive: for unforeseen profit-making
What are some reasons for cash shortages?
- Inability to obtain debt
- Poor credit control procedures
- Selling goods or services at a loss
- Investment in assets not matched by long term financing
- Mjor business developments
What are ways to raise cash at short notice?
- Sell Current assets
-Factoring\ - Short-term loans
- overdraft bank
- delay payments to suppliers
- improve credit control
-Invoice discounting
-Reduce inventory levels
What are considerations when obtaining or extending credit from trade suppliers
- Free source of finance which is not usually charged
but - supplier goodwill might be lost
- passing cash flow problems onto suppliers
- credit rating may be adversely affected
What are advantages and disadvantages when it comes to overdraft facilities
Benefits:
- Very flexible
- May be partly interest feww
- quick and easy
Drawbacks
- Effectively repayable on demand
- intrest rates can change
What are conisderations when obtaining a loan
- Allow to borrow fixed sum over a fixed time
- often lendor requires security for the laon
What are considerations in debt factoring/invoice discounting
- Interest and admin charges
What might happen if entity sells overseas
- Experience longer financing working capital cycle
What options are available to entities which need short term finance due to exporting activities
- Export factoring (same as factoring but for export sales)
- Bill of exchange ( written acknowledgment of debt)
- Forfaiting
What is bill of exchange
- supplier draws up bill of exchange and signs
- customer signs bill of exchange to acknowledge debt
Then:
- Supplier can hold bill untill due date and collect cash payment
- Discount the bill with a bank : sells to bank
- Transfer the bill to its own supplier to settle debts rto them
What is forfaiting
Allows for exporters to obtain medium term finance
- Supplier makes sale to customer and initital small payment with promissory notes to cover balance is given
- Promissory notes are guaranteed by availising bank
- Supplier can sell promissary notes to a forfaiting bank for a discount
What 4 things should an entity consider before investing surplus cahs
- Maturity: the period over which funds will be available to invest
- Return: Form of interest or premium on redemption
- Security: level of risk
- Liquidity: possible to turn investment back into cash at short notice
What are the types of risks attached to investment
- Default risk: principle or intrerest will not be paid on schedule on fixed interest
- Price risk : interest rates may change which might impact value of investrment
- Foreing exchange risk: exchange rate movements will change value of invesment in foreing country
- Regulation risk: unexpected changes in tax or wider regulatoiim may change value of investment
What investment options are available
- Bank deposit accounts (fixed rate)
- Money market accounts (fixed period of time and unaccessible)
- Certificates of deposit (fixed term bank issues debt instrument)
- Treasure bills (government securities)
- Debentures/ coorporate bonds
Government bonds (fixed rates, tradeable)
