Module 14 - Cash Management And Forecasts

Question 1

Four objectives of cash management:

Answer 1

Liquidity

Safety

Profitability

Flexibility

Question 2

Reason businesses fail

Answer 2

Market issues

Business model failure

Weak management team

Cash flow management

Issues with product

Question 3

What is liquidity? (Cash management)

Answer 3

How easily accessible cash is

Question 4

What is safety? (Cash management)

Answer 4

Any investments made by the entrepreneur should be safe

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

Question 5

What is profitability? (cash management)

Answer 5

Once safety and liquidity objectives have been met

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

Question 6

Potential cash inflows

Answer 6

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

Question 7

Potential cash outflows

Answer 7

Payments to creditors

Capital expenditure

Loan repayments

Interest payments

Tax payments

Dividend payments

Question 8

Sort of taken a bit of a sacrifice on this module

Answer 8

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

Question 9

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

Answer 9

A business ceasing to trade

Question 10

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

Answer 10

Make payments as they fall due

Question 11

Can profitable companies fail because of poor cash management?

Answer 11

Yes

Question 12

Profit figures are what?

How are they calculated?

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

Answer 12

Accounting numbers based on accounting standards

As a result of several accounting adjustments

No

Question 13

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

Answer 13

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

Question 14

What is liquidity to do with?

Answer 14

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

Question 15

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

Answer 15

Yes

Question 16

What are the prime objectives of cash management

Answer 16

Liquidity

Safety

Profitability

Flexibility

Question 17

Prime objectives of cash management (what is safety?)

Answer 17

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

Question 18

Prime objectives of cash management (what is profitability)

Answer 18

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

Question 19

Prime objectives of cash management (what is flexibility)

Answer 19

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

Question 20

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

Answer 20

Yes

Question 21

Can issues arise as the exchange rates between currencies fluctuate?

Answer 21

Yes

Question 22

Potential cash inflows

Answer 22

Payments received from debtors

Increases in borrowings

Interest receipts

Question 23

Potential cash outflows

Answer 23

Payments made to creditors

Capital expenditure

Loan repayments

Interest payments

Tax payments

Dividend payments

Question 24

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?

Answer 24

Yes

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

Question 25

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

Answer 25

A cash budget

Question 26

What is a cash budget?

Answer 26

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)

Question 27

What does a cash budget allow the entrepreneur to do?

Answer 27

Monitor the expected cash position of the business accurately

Question 28

Effectively, a cash forecast records what?

Answer 28

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

Question 29

Does the forecast follow an accepted format? If so what is the format?

Answer 29

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

Question 30

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

Answer 30

Yes

Question 31

Interest rates (don’t know if need)

Answer 31

Question 32

Can profit projections also be prepared?

Answer 32

Yes

Question 33

When will the P&L show revenue and expenses? When will cash flow forecast show when revenue and expenses?

Answer 33

When they occur When it is paid or received

Question 34

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

Answer 34

No

Question 35

What happens when an asset is sold in the: P&L Cash flow forecast

Answer 35

Record any expected accounting profit or loss disposal Would record the entire sales proceeds at the point they are received

Question 36

What happens with dividends in the : P&L Cash flow forecast

Answer 36

No appear in P&L (paid out of post-tax profit) Appear as a cash outflow on the payment date

Question 37

Why start-up businesses may fail

Answer 37

Market issues Business model failure Weak management team Cash flow management Issues with product

Question 38

Why start-up businesses may fail: What is Market issues

Answer 38

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

Question 39

Why start-up businesses may fail: What is Business model failure? In order to have a capital efficient business?

Answer 39

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

Question 40

Why start-up businesses may fail: What is Weak management team?

Answer 40

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

Question 41

Why start-up businesses may fail: What is Cash flow management?

Answer 41

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

Question 42

Is cash king?

Answer 42

The saying goes - yes

Question 43

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?

Answer 43

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