Module 14 - Cash Management And Forecasts Flashcards
Four objectives of cash management:
Liquidity
Safety
Profitability
Flexibility
Reason businesses fail
Market issues
Business model failure
Weak management team
Cash flow management
Issues with product
What is liquidity? (Cash management)
How easily accessible cash is
What is safety? (Cash management)
Any investments made by the entrepreneur should be safe
So that the business is not exposed to excessive levels of risk
What is profitability? (cash management)
Once safety and liquidity objectives have been met
The entrepreneur should consider the level of return the business can make on its investments
Potential cash inflows
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
Potential cash outflows
Payments to creditors
Capital expenditure
Loan repayments
Interest payments
Tax payments
Dividend payments
Sort of taken a bit of a sacrifice on this module
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
An inability to make payments is likely to lead to what?
A business ceasing to trade
The availability of cash (or ‘liquidity’) allows a business to what?
Make payments as they fall due
Can profitable companies fail because of poor cash management?
Yes
Profit figures are what?
How are they calculated?
Do they always equal the amount of cash a business has in its bank account?
Accounting numbers based on accounting standards
As a result of several accounting adjustments
No
What is a common reason for the failure of a start-up business
A lack of cash and inability to pay bills when they are due, despite generating profit
What is liquidity to do with?
A business must be able to meet its liabilities as they fall due
Is it crucial the entrepreneur knows what the liabilities of the business are and when they require to be met?
Yes
What are the prime objectives of cash management
Liquidity
Safety
Profitability
Flexibility
Prime objectives of cash management (what is safety?)
Any investments made by the entrepreneur should be safe, so that the business is not exposed to excessive levels of risk
Prime objectives of cash management (what is profitability)
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
Prime objectives of cash management (what is flexibility)
An element of any investment should be flexible to allow the business to react to and accommodate unexpected events
Will more complex businesses which trade across different countries also have to consider differing currencies in which their cash flows are expected to arise?
Yes
Can issues arise as the exchange rates between currencies fluctuate?
Yes
Potential cash inflows
Payments received from debtors
Increases in borrowings
Interest receipts
Potential cash outflows
Payments made to creditors
Capital expenditure
Loan repayments
Interest payments
Tax payments
Dividend payments
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?
Yes
These forecasts should contain their best estimate of what is likely to happen to the business in terms of cash inflows and outflows
A forecast (or ‘projected’) cash statement can sometimes be referred to as what?
A cash budget
What is a cash budget?
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)
What does a cash budget allow the entrepreneur to do?
Monitor the expected cash position of the business accurately
Effectively, a cash forecast records what?
All debit and credit entries that affect the bank or cash balance of the business
Does the forecast follow an accepted format?
If so what is the format?
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
If interest will be received or paid, will this have to be included in the cash flow forecast?
Yes
Interest rates (don’t know if need)
Can profit projections also be prepared?
Yes
When will the P&L show revenue and expenses?
When will cash flow forecast show when revenue and expenses?
When they occur
When it is paid or received
When a business purchases an item of capital equipment, such as a machine, does the purchase cost go through the P&L?
No
What happens when an asset is sold in the:
P&L
Cash flow forecast
Record any expected accounting profit or loss disposal
Would record the entire sales proceeds at the point they are received
What happens with dividends in the :
P&L
Cash flow forecast
No appear in P&L (paid out of post-tax profit)
Appear as a cash outflow on the payment date
Why start-up businesses may fail
Market issues
Business model failure
Weak management team
Cash flow management
Issues with product
Why start-up businesses may fail:
What is Market issues
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
Why start-up businesses may fail:
What is Business model failure?
In order to have a capital efficient business?
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
Why start-up businesses may fail:
What is Weak management team?
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
Why start-up businesses may fail:
What is Cash flow management?
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
Is cash king?
The saying goes - yes
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?
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
