10. Cash Management and Short Term Finance

Question 1

What are the 3 motives for holding cash?

Answer 1

1. Transactions
2. Precautionary (buffer)
3. Speculative

Question 2

What is the main cost of holding cash?

Answer 2

Lost interest on potential investments

Question 3

What are 3 typical cash receipts?

Answer 3

1. Receipts from customers
2. Proceeds from sale of assets
3. Cash introduced into the business (shares, loans)

Question 4

What are 5 typical cash payments?

Answer 4

1. Payments to suppliers
2. Wages to employees
3. Purchase of non current assets
4. Overheads
5. Repayment of finance

Question 5

What are the 6 key ways of accessing short term finance?

Answer 5

1. Bank overdraft
2. Short term loans
3. Debt factoring (sell receivables to factoring comp)
4. Invoice discounting (sell receivables to inv discounter)
5. Trade payables (few months payment period)
6. Financing exports (overseas debt factoring)

Question 6

What are the negatives of a bank overdraft?

Answer 6

They are repayable on demand and the interest rates are higher than loans

Question 7

What are the positives of a bank overdraft?

Answer 7

Easily accessible, interest paid only on the amount of the facility used

Question 8

What are the 3 key ways of accessing long term finance?

Answer 8

1. Long term loans
2. Issuing shares
3. Sale and leaseback of NCA

Question 9

What are the 5 investment criteria to be considered when a business is going to invest a cash surplus?

Answer 9

1. Maturity (how long is the surplus going to exist for)
2. Risk and security (riskier are better long term)
3. Expected return (income/capital return)
4. Liquidity
5. Diversification

Question 10

What are the 2 trade offs that often exist when making investment decisions?

Answer 10

Risk vs return and liquidity vs return

Question 11

What are the 5 alternative investment options for businesses with surplus cash?

Answer 11

1. Certificates of Deposit
2. Treasury Bills
3. Securities/Shares
4. Commercial papers
5. Money market deposits

Question 12

What are Certificates of Deposit?

Answer 12

A certificate issued by a bank which certifies that a sum of money has been deposited, providing a fixed rate of interest over a minimum term (can be traded before they mature)

Question 13

What are Treasury Bills?

Answer 13

Short-term securities issued by the government at a discount (earn no interest but can be sold or redeemed at a higher value)

Question 14

What are commercial papers?

Answer 14

Certificates issued by companies or banks promising to pay a fixed amount at a specified future date (unsecured, carry high risk but high return)

Question 15

What are the positives and negatives of investing on the money market?

Answer 15

High interest rates, but money cannot be withdrawn until the deposit matures

Question 16

What are the 4 additional options for companies who trade internationally?

Answer 16

1. Bills of Exchange (acknowledgement of debt)
2. Documentary credits (allow drawing of funds)
3. Forfaiting (selling a bill of exchange at a discount to a 3rd party, receive cash immediately)
4. Export factoring (debt factoring for overseas)