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EY Accounting - Business Acumen > Module 14 - Cash Management And Forecasts > Flashcards

Module 14 - Cash Management And Forecasts Flashcards

1
Q

Four objectives of cash management:

A

Liquidity

Safety

Profitability

Flexibility

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2
Q

Reason businesses fail

A

Market issues

Business model failure

Weak management team

Cash flow management

Issues with product

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3
Q

What is liquidity? (Cash management)

A

How easily accessible cash is

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4
Q

What is safety? (Cash management)

A

Any investments made by the entrepreneur should be safe

So that the business is not exposed to excessive levels of risk

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5
Q

What is profitability? (cash management)

A

Once safety and liquidity objectives have been met

The entrepreneur should consider the level of return the business can make on its investments

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6
Q

Potential cash inflows

A

Payments received from debtors

Increases in borrowings (check this) (think this is like when you get a loan you do get some money coming in)

Interest receipts

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7
Q

Potential cash outflows

A

Payments to creditors

Capital expenditure

Loan repayments

Interest payments

Tax payments

Dividend payments

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8
Q

Sort of taken a bit of a sacrifice on this module

A

The long questions are too long

Exam advice does say - students should learn differences between items in a cash flow forecast and a profit and loss projection

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9
Q

An inability to make payments is likely to lead to what?

A

A business ceasing to trade

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10
Q

The availability of cash (or ‘liquidity’) allows a business to what?

A

Make payments as they fall due

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11
Q

Can profitable companies fail because of poor cash management?

A

Yes

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12
Q

Profit figures are what?

How are they calculated?

Do they always equal the amount of cash a business has in its bank account?

A

Accounting numbers based on accounting standards

As a result of several accounting adjustments

No

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13
Q

What is a common reason for the failure of a start-up business

A

A lack of cash and inability to pay bills when they are due, despite generating profit

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14
Q

What is liquidity to do with?

A

A business must be able to meet its liabilities as they fall due

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15
Q

Is it crucial the entrepreneur knows what the liabilities of the business are and when they require to be met?

A

Yes

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16
Q

What are the prime objectives of cash management

A

Liquidity

Safety

Profitability

Flexibility

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17
Q

Prime objectives of cash management (what is safety?)

A

Any investments made by the entrepreneur should be safe, so that the business is not exposed to excessive levels of risk

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18
Q

Prime objectives of cash management (what is profitability)

A

Once the objectives of liquidity and safety have been met, the entrepreneur should consider the level of return the business can make on its investments

19
Q

Prime objectives of cash management (what is flexibility)

A

An element of any investment should be flexible to allow the business to react to and accommodate unexpected events

20
Q

Will more complex businesses which trade across different countries also have to consider differing currencies in which their cash flows are expected to arise?

A

Yes

21
Q

Can issues arise as the exchange rates between currencies fluctuate?

A

Yes

22
Q

Potential cash inflows

A

Payments received from debtors

Increases in borrowings

Interest receipts

23
Q

Potential cash outflows

A

Payments made to creditors

Capital expenditure

Loan repayments

Interest payments

Tax payments

Dividend payments

24
Q

Must the entrepreneur monitor the current cash position of the business and decide how this is likely to change by preparing forecasts for the future?

What should these forecasts contain?

A

Yes

These forecasts should contain their best estimate of what is likely to happen to the business in terms of cash inflows and outflows

25
Q

A forecast (or ‘projected’) cash statement can sometimes be referred to as what?

A

A cash budget

26
Q

What is a cash budget?

A

A statement in which estimated future cash receipts and payments and tabulated to show the forecast cash balance of the business at defined intervals (eg quarterly)

27
Q

What does a cash budget allow the entrepreneur to do?

A

Monitor the expected cash position of the business accurately

28
Q

Effectively, a cash forecast records what?

A

All debit and credit entries that affect the bank or cash balance of the business

29
Q

Does the forecast follow an accepted format?

If so what is the format?

A

Yes

Separating out cash inflows and outflows

Showing the net cash flow in a period and closing the bank position at the end of the period

30
Q

If interest will be received or paid, will this have to be included in the cash flow forecast?

A

Yes

31
Q

Interest rates (don’t know if need)

A
32
Q

Can profit projections also be prepared?

A

Yes

33
Q

When will the P&L show revenue and expenses?

When will cash flow forecast show when revenue and expenses?

A

When they occur

When it is paid or received

34
Q

When a business purchases an item of capital equipment, such as a machine, does the purchase cost go through the P&L?

A

No

35
Q

What happens when an asset is sold in the:

P&L

Cash flow forecast

A

Record any expected accounting profit or loss disposal

Would record the entire sales proceeds at the point they are received

36
Q

What happens with dividends in the :

P&L

Cash flow forecast

A

No appear in P&L (paid out of post-tax profit)

Appear as a cash outflow on the payment date

37
Q

Why start-up businesses may fail

A

Market issues

Business model failure

Weak management team

Cash flow management

Issues with product

38
Q

Why start-up businesses may fail:

What is Market issues

A

Set-up in a place where there is little or no market for their product or service

May be due to bad product/service but could have got market timing wrong

Maybe market is too small

39
Q

Why start-up businesses may fail:

What is Business model failure?

In order to have a capital efficient business?

A

LTV may not exceed CAC

In order to have a capital efficient business, a start-up should aim to recover CAC in less than 12 months from the customer acquisition date

40
Q

Why start-up businesses may fail:

What is Weak management team?

A

Weak management team make errors

Failure to execute plans (eg product manufacturing)

Failure to build a good strategy

Failure to build a strong team below them

41
Q

Why start-up businesses may fail:

What is Cash flow management?

A

Management must know how to control the “pace” of the business journey and when to brake or accelerate the business speed in order to manage cash flow effectively

42
Q

Is cash king?

A

The saying goes - yes

43
Q

Why start-up businesses may fail:

What is Issues with product?

What is important to do to try and reduce the risk of this happening?

A

Developing a product which does not meet the needs of the market

Sufficient planning upfront is important before launching a product to reduce the likelihood of failure

EY Accounting - Business Acumen (16 decks)

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