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AAT Level 4 > Cash and Treasury Management > Flashcards

Cash and Treasury Management Flashcards

1
Q

What is a sign on overtrading?

A
  • rapidly increased sales
  • falling profit margins
  • inability to collect debts promptly
  • reduced cash balances
  • increase in overdraft
  • delaying payments to suppliers
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2
Q

What is a remedy for overtrading?

A
  • Reduce sales to a manageable level

and/or

  • increase resources through increased capital
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3
Q

When does overtrading occur?

A

Overtrading occurs when a business expands rapidly and then has insufficient working capital and cash to support the increased trade.

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4
Q

What is overcapitalism?

A

Overcapitalisation is the opposite of overtrading. It involves having more resources tied up in working capital than is needed.

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5
Q

What is the sign of overcapitalism?

A
  • high level of inventory, receivables and cash

- payments being made to suppliers before they are due

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6
Q

What are the remedies of overcapitalism?

A
  • improved management of working capital
  • using spare resources for profitable investments
  • repayment of any
    unnecessary loans
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7
Q

How do you work out average annual change?

A

Number of years - 1

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8
Q

How do you work out index numbers?

A

current cash flow x future index/current index = future cash flow

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9
Q

What are the benefits of forecasting?

A
  • 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
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10
Q

What are the limitations of forecasting?

A
  • 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
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11
Q

How will a settlement discount affect cash flow?

A
  • 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.
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12
Q

When do we normally pay our corporation tax bill?

A

9 months and one day after year end or quarterly payment on account

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13
Q

What is sensitivity analysis?

A

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.

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14
Q

In what instances is early settlement discount used?

A

Be offered to encourage our customers to pay us earlier.

Be offered by our suppliers so that we pay earlier.

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15
Q

What is the budget cycle?

A

Plan
Monitor
Control

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16
Q

What are some actions we could take if the labour costs increase?

A

increase labour efficiency
reduce absenteeism
reduce overtime working
negotiate flexible contracts

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17
Q

What are some actions we could take if purchase price increased?

A

change suppliers

negotiate better prices

18
Q

What are some actions we could take if payments are made prematurely?

A

negotiate longer credit term

ensure available credits taken in full

19
Q

What are some actions we could take if purchase volumes increase?

A

improve stock control

reduce wastage

20
Q

What are some actions we could take if sale volume reduce?

A

improve product
improve marketing
reduce selling price

21
Q

What are some actions we could take if receipts from cash sales are delayed?

A

improve credit control

offer discount for prompt payment

22
Q

What functions do the bank of england carry out?

A
  • 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.
23
Q

What is the UK Money markets?

A

This is a market for borrowing money and investing money, again at a cost in the form of an interest rate.

24
Q

What is the interbank market?

A

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.

25
Q

What are some example of BoE lending and borrowing?

A
  • 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.
26
Q

What is the monetary policy?

A

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!

27
Q

What should a long term effective monetary policy do?

A
  • Maintain price stability (inflation target set by Government)
  • Achieve stable employment
  • Achieve economic growth (GDP )
  • Avoid a recession (GDP for 2 successive quarters)
28
Q

What is quantitative easing?

A

Quantitative Easing is a method of increasing the amount of money in the economy.

29
Q

What is effect of a rise in interest rates of a business?

A
  • 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.
30
Q

What is effect of a fall in interest rates of a business?

A
  • The cost of borrowing will decrease which encourages investment.
  • The rate of inflation will stabilise or even fall.
31
Q

What are some types of short term investments?

A
  • Money market interbank deposits
  • Certificates of deposit
  • Treasury bills
  • Bank deposit accounts
32
Q

What is a money market interbank deposit?

A
  • 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
33
Q

What is a certificate of deposit?

A

Issued by the bank
Minimum of 50,000
Low risk

34
Q

What is a treasury bill?

A

Three month tradable certificates
Government backed
Low interest
Low risk

35
Q

What is a bank deposit account?

A 
Smaller amounts
(under 50K)
Fixed term, notice term or immediate
Low risk
Flexible liquidity
36
Q

What is the aim of treasury activities in a trading company?

A

to earn a reasonable return on any surplus cash but not to speculate.

37
Q

What are some key facts on Gilts (Gov Stock)

A
  • 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
38
Q

What are some key facts for shares?

A
  • 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
39
Q

What are some key facts for GOLD?

A 
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
40
Q

What are some key facts for property?

A

Rental income
Capital Growth likely
High risk in commercial property
Low liquidity due to selling

YIELD: RENT PER YEAR / PROPERTY VALUE

AAT Level 4 (7 decks)

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