Module 2 Flashcards

1
Q

Objectives of cash flow forecasting

A

Ensures that sufficient funds will be available when needed to sustain the activities of a business

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2
Q

Must consider in cash flow forecasting (4)

A
  • How much cash is required
  • When it is required
  • How long it will be required for
  • Whether it will be available
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3
Q

Objectives of cash flow forecasting (4)

A
  • Financial control
  • Capital budgeting
  • Maximise interest earnings
  • Minimise cost of borrowing
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4
Q

Short term surplus management action (3)

A
  • Pay accounts payable early to obtain discount
  • Make short term investments
  • Attempt to increase sales by increasing accounts receivable and inventories
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5
Q

Short term deficit management action (3)

A
  • Delay payments to suppliers
  • Improve collection of overdue payments
  • Arrange overdraft facility
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6
Q

Long term surplus management actions (5)

A
  • Make long term investments
  • Expand
  • Diversify
  • Replace/ update non-current assets
  • Distribute surplus to shareholders
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7
Q

Long term deficit management actions (2)

A
  • Raise long-term finance

- Consider shutdown/ disinvestment opportunities

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8
Q

Difficulties with cash flow forecasting (3)

A
  • Based on estimates
  • Uncertain business environment eg unforeseen changes
  • Historic information - not applicable to new/ rapidly growing businesses
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9
Q

Receipts and payments method

A

Short term forecasts

Based on expectation of individual cash flows

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10
Q

Cash flow method

A

Long term forecasts

Based on budgeted statements

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11
Q

Short term forecast objective <30 days

A

To identify cash receipts and payments to aid day-to-day management of cash flow

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12
Q

Medium term forecast objective > 1 month - 1 year

A

To establish overall cash averages to give a feel for overall funding

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13
Q

Long term forecast objective > > 1 year

A

Considers longer term strategy of the company

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14
Q

Sensitivity analysis variables (3)

A
  • Currency fluctuations
  • Rates of inflation
  • Rates of interest
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15
Q

Forecast sources of information (5)

A
  • PY actual cash flows
  • Revenue projections
  • Purchase projections
  • Accounts payable/ receivable data
  • Investment plans
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16
Q

Output VAT

A

VAT on the sale of goods and the provision of services

17
Q

Input VAT

A

VAT on the purchase of goods and payment of expenses

18
Q

Depreciation in cash flow

A

Should be ignored

19
Q

Interest rates cash flow

A

Often annual - will need updating

20
Q

Cryptocurrencies > advantages (2)

A
  • Lower transaction cost

- Blockchain is self-verifying

21
Q

Cryptocurrencies > disadvantages (2)

A
  • Hit by scandals

- No central bank governance

22
Q

Working capital

A

Capital available to fund the day-to-day operations of an entity

23
Q

Working capital cycle

A

Days inventory + Days trade receivables - days trade payables

24
Q

Working capital cycle shows

A

Time period between cash going out and coming into business

25
Credit control policies (3)
- Credit terms - Procedures for offering credit - Control
26
Settlement discount consideration
Compare cost of discount with benefit of reduced investment in trade receivables
27
Factoring =
Sale of debts to a third party (factor) at a discount in return for prompt cash
28
Factoring service with recourse
Bad debts passed back to entity
29
Factoring service without recourse (non-recourse)
Where factor bears any bad debts
30
Services provided by a factor (3)
- Provision of cash - Sales ledger administration - Credit insurance
31
Invoice discounting =
Entity maintains administration of sales ledger but sells selected invoices to invoice discounter purely to obtain an advance of cash
32
Managing inventory (3)
- No overstocking - Lead times of suppliers are minimised - May negotiate consignment inventory arrangement
33
Total annual cost of having inventory (T) =
Holding costs + Order costs
34
Economic order quantity =
Model finds the order quantity that minimises annual inventory costs
35
EOQ based on three assumptions
- Demand is constant - Lead time is constant or zero - Purchase costs per unit are constant
36
Fintech impact on working capital strategies
Advanced analytics can be used to analyse, model and predict implications of changing working capital management strategies and speed up processes
37
Good cash management policies should include (4)
- Instructions - Negotiation - Internal handing - Foreign currency accounts