Cash budgetings and resources ratios Flashcards
What is the purpose of cash budgets ? P307
- Details – bank receipts and payments
- Monty by month basis -3, 6, or 12
- Forecasts bank balance
What does a cash budget focus on ? p307
- detail receipts and payments
- Focus – liquid funds held in a bank
What do managers get from a cash budget ? P307
- Action to take : surplus money/ overdraft to be arranged
What is the main difference between cash and profit? p307
- Cash – money in bank/ physical cash (e.g. cash till)
- Profit – calculated -surplus of income over expenditure
What does profit take into consideration that cash does not? P307
- Adjustment to accruals and prepayments
- Non cash items – depreciation and provision of doubtful receivables
What does profit not take into consideration? P307
- Capital expenditure – purchase of non current assets
- Owners drawings/ dividends
- Loan raises and repaid
What is the difference between cash and profit when looking at inventory? p308
- More inventory purchased = increase in profit when selling
- Paying for inventory = reduces money in the bank – money back (ex sales)
What is the difference between cash and profit when considering prepayment of expenses at the year end? P308
- Prepayment = next year = no effect -this year’s profit
- Bank balance affected
What is the difference between cash and profit when looking into loansre payment? p308
- Profit = no effect
- Bank balance = reduce
What is the difference between cash and profit when considering drawings/ dividends paid to owners?
- Profit = no effect
- Bank balance affected
How would the differences work if the business is not making a profit? P308
- Reverse
- Money flowing in – to extent – receipts from receivables/ payments to payables / sale of nca
What can a business show within receipts/ payments in a cash budget on a spreadsheet ? P309
- Innumerable row items – no set format
What does the summary of the bank account -at the bottom of the cash budget show? P309
- Net cash flow (total receipts – total payments) + bank balance
- Estimated closing bank balance/ overdraft end of the month.
- Overdraft = figure in brackets/ minus sign
What does depreciation of non current asset not feature in cash budgets ? P310
- Non-cash expense i.e. no cash flow
Why is the timing of receipts and payments important when preparing a cash budget? p310
- Preparing budgets – purchases, sales, expenses , acquisition/ disposal of nca
- timing estimated
- Requirement for capital/ loans / bank overdraft can be anticipated
Why is the timing of receipts from trade receivables important in a cash budget? P311
- Cash flow of business affected – credit financed from seller
- Cash flow from customers = no delays
- Delayed payment = credit controller chase systematically
What allowances must be noted for trade receivables when looking at cash budgets? p311
- Prompt payment discount
- Irrecoverable debts
Why is timing of payments to trade payables important in a cash budget? P312
- Delivery refusal / production of whole business
- financed by seller
- cash must be available
What are payments to supplier linked to ? P312
- Cash budget - records payment to trade payable
- Master budget - liability - forecast SOFP
What allowances must be noted for trade payables when looking at cash budgets? p312
- Prompt payment discount – affect budgeted cash payments
What are the main funding methods available for acquiring non -current assets? P314
- Cash purchase
- Part-exchange
- Borrowing – loans
- Borrowing – hire purchase
What is the cash purchase way of acquiring a non-current asset? p314
- Sufficient funds
- standard commercial credit
- legal title acquired - date of purchase
What is the part-exchange way of acquiring a non current asset? P314
- Old asset – traded in – new asset
- Remaining balance – cash / borrowing
What is the borrowing (loans) way of acquiring a non-current asset? P314
- Bank / finance company lends money
- Ownership of asset for business – security
- Repayment for interests
*
What must be noted about bank overdrafts and loans? p314
- Not the same as loan
- Short term facility
- Not for funding – NCA
What is the hire purchase way of acquiring a non-current asset? p315
- Use of NCA = Deposit
- owned by finance company
- end of term - business owns
- medium term agreement
What are resources ratios used for? P315
- measures- management control – aspects of business (inventories, payables, receivables)
- Comparisons – figures previous year/ similar business
What is the inventory holding period calculation show ? P315
- Average number of days inventory held
- Types of goods sold – florist 1 day & jewellary (60/ 90 days)*
What is the goal with inventory holding periods? p315
- Short as possible – meet needs of customer
What is the formula for inventory holding periods? P315
Inventories/ costs of sales * 365
What type of business can an inventory holding period only be calculated for? p315
- Company providing goods – not service.
What is the formula for trade receivable collection period? P315
Trade receivables / revenue * 365
What is the trade receivable collection period calculation show ? p315
- Average days – payment received from trade receivables
- Comparison – year to year or similar businesses – efficiency in collecting money
What is the goal with the trade receivable collection period? P316
- Reduction
- Goal = Receivables’ days shorter than payable days
- Money received before paid – payables
What is the trade payable collection period? p316
- Speed – payment to trade payables
- Longer than trade receivables
- Similar figure one year to the next = stable company
What is the trade payable formula? P316
- Trade payables / costs of sales * 365
What is the working cycle calculation ? P316
working capital cycle = inventory days + receivable days - payable days
What is the working capital cycle concerned with? p316
- Ratio further use - working capital items:
1. Inventory
2. Trade receivables
3. Trade payables - Time between – payment of goods received and collection of cash
- Shorter time outlay & collection of cash = lower amount of working capital
What must be done with a working capital once calculated? P317
- Compared – previous year / similar business
- Better position = time has reduced
- Worse position = time has increased *
What are the two options available when a business has been set up with too little liquidity? P318
- Additional finance- form of capital
- Additional debt finance – loans, overdrafts, hire-purchase
- Smaller businesses – family/ friends help with finance
What are the options for improving the cash flow of working capital cycle? p318
- Speedup debt collection
- slow down - payment suppliers
- reduce inventory
- Customer prompt payment discount
- NCA disposal
