Chapter 10 - Working capital management - cash and funding strategies Flashcards
What are the motives for holding cash?
- transactions motive (day-to-day expenses)
- precautionary motive - meet unplanned expenditure
- investment motive - to take advantage of investment opportunities
Failure to hold enough cash can lead to what?
- loss of settlement discounts
- loss of supplier goodwill
- poor industrial relations
- potential liquidation
What is a cash forecast?
- An estimate of cash receipts and payments for a future period under existing conditions
What is a cash budget?
- a commitment to a plan for cash receipts and payments for a future period after taking any action necessary to bring the forecast into line with the overall business plan
Cash budgets are used for what?
- assess and integrate operating budgets
- plan for cash shortages and surpluses
- compare with actual spending
Cash forecasts are used for what?
- a receipts and payments forecast
- a statement of financial position forecast
- working capital ratios
What are the 2 cash management models?
Baumol model
The miller-orr cash management model
cash management models are aimed at minimising the total costs associated with movements between what?
- a current account
- short-term investment
What is the baumol model?
it is based on the economic order quantity (EOQ)
When is the baumol model most useful?
when cash balances move steadily in one direction over time
What is the miller-orr model?
controls irregular movements of cash by the setting of upper and lower control limits on cash balances
When is the miller-orr model most useful?
when cash balances fluctuate up and down over time
When are short-term cash investments required?
if a business has a temporary cash surplus
To weigh up an investment a company has to weigh up what 3 potential conflicting objectives and factors?
liquidity
safety
profitability
What are the 2 main sources of bank lending?
- bank overdraft
- bank loans
