Cash and Treasury Management Flashcards
What is a sign on overtrading?
- rapidly increased sales
- falling profit margins
- inability to collect debts promptly
- reduced cash balances
- increase in overdraft
- delaying payments to suppliers
What is a remedy for overtrading?
- Reduce sales to a manageable level
and/or
- increase resources through increased capital
When does overtrading occur?
Overtrading occurs when a business expands rapidly and then has insufficient working capital and cash to support the increased trade.
What is overcapitalism?
Overcapitalisation is the opposite of overtrading. It involves having more resources tied up in working capital than is needed.
What is the sign of overcapitalism?
- high level of inventory, receivables and cash
- payments being made to suppliers before they are due
What are the remedies of overcapitalism?
- improved management of working capital
- using spare resources for profitable investments
- repayment of any
unnecessary loans
How do you work out average annual change?
Number of years - 1
How do you work out index numbers?
current cash flow x future index/current index = future cash flow
What are the benefits of forecasting?
- Identifies possible opportunities to invest surplus funds
- Identifies what cash may be required at certain times – liquidity issues
- Ensures a systematic approach is taken to create receipts and payments
- Can be used to ‘test’ impact of negotiations with suppliers and customers e.g. credit terms offered by suppliers or to customers
What are the limitations of forecasting?
- Assumptions made on historical information
- It assumes that everything continues as normal, i.e. the business will continue to grow or price to reduce.
- Is the data used reliable
- The volume of data available
- Does not allow for unforeseen events, i.e. boom or bust
- Does not take into consider the product life cycle
How will a settlement discount affect cash flow?
- A business may offer a settlement discount on its sales, this will affect the amount of cash inflow from sales on credit.
- Customers who take up the discount will pay earlier but pay less, so it will impact upon the cash inflow in two ways.
When do we normally pay our corporation tax bill?
9 months and one day after year end or quarterly payment on account
What is sensitivity analysis?
Sensitivity analysis helps us to determine which assumptions are critical and which have less impact.
Sensitivity analysis is a technique that investigates the impact that changes will have on the budget, so that the organisation can be made aware of how the situation can vary from the projected position.
In what instances is early settlement discount used?
Be offered to encourage our customers to pay us earlier.
Be offered by our suppliers so that we pay earlier.
What is the budget cycle?
Plan
Monitor
Control
What are some actions we could take if the labour costs increase?
increase labour efficiency
reduce absenteeism
reduce overtime working
negotiate flexible contracts
What are some actions we could take if purchase price increased?
change suppliers
negotiate better prices
What are some actions we could take if payments are made prematurely?
negotiate longer credit term
ensure available credits taken in full
What are some actions we could take if purchase volumes increase?
improve stock control
reduce wastage
What are some actions we could take if sale volume reduce?
improve product
improve marketing
reduce selling price
What are some actions we could take if receipts from cash sales are delayed?
improve credit control
offer discount for prompt payment
What functions do the bank of england carry out?
- The banker to the Government.
- Banker to other banks.
- Responsible for note printing, gold and foreign currency reserve.
- To help influence interest rates in the economy with the aim to control inflation.
What is the UK Money markets?
This is a market for borrowing money and investing money, again at a cost in the form of an interest rate.
What is the interbank market?
One of the major sterling money markets is the interbank market which involves banks and other large institutions lending to each other over short periods.
What are some example of BoE lending and borrowing?
- Using Operational Standing Facilities, the BoE can lend overnight to other banks.
- Using Open Market Operations, the BoE can put in or take out funds from the banking system:
- Buying or selling gilts from or to Banks
- Using repo (repurchase) agreements where the BoE buys securities from the bank, agreeing to sell them back at a later date – essentially secured short term loans (3-6 months)
- The Discount Window Facility allows banks to borrow gilts for the BoE, to improve liquidity, as these can be converted easily to cash.
What is the monetary policy?
Monetary policy involves controlling the money circulating in the economy.
Too much and inflation can go high; too little and the economy will not function properly or be able to grow!
What should a long term effective monetary policy do?
- Maintain price stability (inflation target set by Government)
- Achieve stable employment
- Achieve economic growth (GDP )
- Avoid a recession (GDP for 2 successive quarters)
What is quantitative easing?
Quantitative Easing is a method of increasing the amount of money in the economy.
What is effect of a rise in interest rates of a business?
- The cost of borrowing will increase.
- A rise in interest rates is often associated with a rise in inflation.
- The value of the currency will tend to rise in the short-term, making exports more expensive but imports cheaper.
What is effect of a fall in interest rates of a business?
- The cost of borrowing will decrease which encourages investment.
- The rate of inflation will stabilise or even fall.
What are some types of short term investments?
- Money market interbank deposits
- Certificates of deposit
- Treasury bills
- Bank deposit accounts
What is a money market interbank deposit?
- Short term deposits by banks to each other
- Usually overnight
- Notice deposits (days) or fixed (longer periods)
- Low risk
- Higher rate than a standard deposit account
- Liquidity is flexible
What is a certificate of deposit?
Issued by the bank
Minimum of 50,000
Low risk
What is a treasury bill?
Three month tradable certificates
Government backed
Low interest
Low risk
What is a bank deposit account?
Smaller amounts (under 50K) Fixed term, notice term or immediate Low risk Flexible liquidity
What is the aim of treasury activities in a trading company?
to earn a reasonable return on any surplus cash but not to speculate.
What are some key facts on Gilts (Gov Stock)
- Fixed interest rate
- Fixed period
- Low Risk
- Tradeable so “liquid”
- Maturity types: short, medium and long
- Using stated in £1s but sometimes £100s
YIELD: INTEREST RATE / MARKET PRICE
What are some key facts for shares?
- Equity or Preference shares
- Higher risk as prices can vary
- Shares can increase and give high returns
- Usually a medium to long term investment
- Although liquid might take time to sell or forced to take a loss
YIELD: SHARE PRICE / MARKET PRICE PER SHARE
What are some key facts for GOLD?
Is considered a safe store of value High risk in the short term Highly liquid is sold through a dealer Long term investment YIELD: (Final market price – purchase price)/ purchase price x 100
What are some key facts for property?
Rental income
Capital Growth likely
High risk in commercial property
Low liquidity due to selling
YIELD: RENT PER YEAR / PROPERTY VALUE
