Managing Cash Flashcards
What is a cash budget?
Detailed forecast of expected cash receipts, payments and cash balances over the planning period
What are the three primary benefits of holding cash?
- Transactions motives: to make purchases and pay for expenses
- Precautionary motive: for unseen spending, just in case
- Speculative motive: for unforeseen profit-making
What are some reasons for cash shortages?
- Inability to obtain debt
- Poor credit control procedures
- Selling goods or services at a loss
- Investment in assets not matched by long term financing
- Mjor business developments
What are ways to raise cash at short notice?
- Sell Current assets
-Factoring\ - Short-term loans
- overdraft bank
- delay payments to suppliers
- improve credit control
-Invoice discounting
-Reduce inventory levels
What are considerations when obtaining or extending credit from trade suppliers
- Free source of finance which is not usually charged
but - supplier goodwill might be lost
- passing cash flow problems onto suppliers
- credit rating may be adversely affected
What are advantages and disadvantages when it comes to overdraft facilities
Benefits:
- Very flexible
- May be partly interest feww
- quick and easy
Drawbacks
- Effectively repayable on demand
- intrest rates can change
What are conisderations when obtaining a loan
- Allow to borrow fixed sum over a fixed time
- often lendor requires security for the laon
What are considerations in debt factoring/invoice discounting
- Interest and admin charges
What might happen if entity sells overseas
- Experience longer financing working capital cycle
What options are available to entities which need short term finance due to exporting activities
- Export factoring (same as factoring but for export sales)
- Bill of exchange ( written acknowledgment of debt)
- Forfaiting
What is bill of exchange
- supplier draws up bill of exchange and signs
- customer signs bill of exchange to acknowledge debt
Then:
- Supplier can hold bill untill due date and collect cash payment
- Discount the bill with a bank : sells to bank
- Transfer the bill to its own supplier to settle debts rto them
What is forfaiting
Allows for exporters to obtain medium term finance
- Supplier makes sale to customer and initital small payment with promissory notes to cover balance is given
- Promissory notes are guaranteed by availising bank
- Supplier can sell promissary notes to a forfaiting bank for a discount
What 4 things should an entity consider before investing surplus cahs
- Maturity: the period over which funds will be available to invest
- Return: Form of interest or premium on redemption
- Security: level of risk
- Liquidity: possible to turn investment back into cash at short notice
What are the types of risks attached to investment
- Default risk: principle or intrerest will not be paid on schedule on fixed interest
- Price risk : interest rates may change which might impact value of investrment
- Foreing exchange risk: exchange rate movements will change value of invesment in foreing country
- Regulation risk: unexpected changes in tax or wider regulatoiim may change value of investment
What investment options are available
- Bank deposit accounts (fixed rate)
- Money market accounts (fixed period of time and unaccessible)
- Certificates of deposit (fixed term bank issues debt instrument)
- Treasure bills (government securities)
- Debentures/ coorporate bonds
Government bonds (fixed rates, tradeable)
What is formula for compund interest
S= X(1+r)^n
S= terminal value
X= initial investment value
N= number of periods
R= interest rate
What is doicumentary credit
A document issued by a bank on behalf of a customer authorising a person to draw money to a specified amount from its branches or correspondents, usually in another country, when the conditions set out in the document have been met.
What are bond rates
The coupon rate determines the amount of interest received annually.
The yield to maturity is the discount rate that should be used to discount the amounts received.
