Module 2

Question 1

Objectives of cash flow forecasting

Answer 1

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

Question 2

Must consider in cash flow forecasting (4)

Answer 2

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

Question 3

Objectives of cash flow forecasting (4)

Answer 3

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

Question 4

Short term surplus management action (3)

Answer 4

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

Question 5

Short term deficit management action (3)

Answer 5

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

Question 6

Long term surplus management actions (5)

Answer 6

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

Question 7

Long term deficit management actions (2)

Answer 7

• Raise long-term finance

- Consider shutdown/ disinvestment opportunities

Question 8

Difficulties with cash flow forecasting (3)

Answer 8

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

Question 9

Receipts and payments method

Answer 9

Short term forecasts

Based on expectation of individual cash flows

Question 10

Cash flow method

Answer 10

Long term forecasts

Based on budgeted statements

Question 11

Short term forecast objective <30 days

Answer 11

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

Question 12

Medium term forecast objective > 1 month - 1 year

Answer 12

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

Question 13

Long term forecast objective > > 1 year

Answer 13

Considers longer term strategy of the company

Question 14

Sensitivity analysis variables (3)

Answer 14

• Currency fluctuations
• Rates of inflation
• Rates of interest

Question 15

Forecast sources of information (5)

Answer 15

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

Question 16

Output VAT

Answer 16

VAT on the sale of goods and the provision of services

Question 17

Input VAT

Answer 17

VAT on the purchase of goods and payment of expenses

Question 18

Depreciation in cash flow

Answer 18

Should be ignored

Question 19

Interest rates cash flow

Answer 19

Often annual - will need updating

Question 20

Cryptocurrencies > advantages (2)

Answer 20

• Lower transaction cost

- Blockchain is self-verifying

Question 21

Cryptocurrencies > disadvantages (2)

Answer 21

• Hit by scandals

- No central bank governance

Question 22

Working capital

Answer 22

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

Question 23

Working capital cycle

Answer 23

Days inventory + Days trade receivables - days trade payables

Question 24

Working capital cycle shows

Answer 24

Time period between cash going out and coming into business

Question 25

Credit control policies (3)

Answer 25

• Credit terms
• Procedures for offering credit
• Control

Question 26

Settlement discount consideration

Answer 26

Compare cost of discount with benefit of reduced investment in trade receivables

Question 27

Factoring =

Answer 27

Sale of debts to a third party (factor) at a discount in return for prompt cash

Question 28

Factoring service with recourse

Answer 28

Bad debts passed back to entity

Question 29

Factoring service without recourse (non-recourse)

Answer 29

Where factor bears any bad debts

Question 30

Services provided by a factor (3)

Answer 30

• Provision of cash
• Sales ledger administration
• Credit insurance

Question 31

Invoice discounting =

Answer 31

Entity maintains administration of sales ledger but sells selected invoices to invoice discounter purely to obtain an advance of cash

Question 32

Managing inventory (3)

Answer 32

• No overstocking
• Lead times of suppliers are minimised
• May negotiate consignment inventory arrangement

Question 33

Total annual cost of having inventory (T) =

Answer 33

Holding costs + Order costs

Question 34

Economic order quantity =

Answer 34

Model finds the order quantity that minimises annual inventory costs

Question 35

EOQ based on three assumptions

Answer 35

• Demand is constant
• Lead time is constant or zero
• Purchase costs per unit are constant

Question 36

Fintech impact on working capital strategies

Answer 36

Advanced analytics can be used to analyse, model and predict implications of changing working capital management strategies and speed up processes

Question 37

Good cash management policies should include (4)

Answer 37

• Instructions
• Negotiation
• Internal handing
• Foreign currency accounts