Session 9 - Cash Budgetng and resources ratios Flashcards

1
Q

What is a cash budget?

A

It is a budget which details a forecast of the bank receipts and payments on a month by month basis to show the forecast bank balance at the end of each month

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2
Q

List 7 reasons as to why a business can be making a profit but it’s bank balance is reducing?

A

Capital expenditure - Buying non-current assets reduces the businesses cash balance but only the depreciation affects profit

Increase in trade receivables - Goods might be being sold which leads to an increase in profit but until the customers pay on credit the bank balance will remain the same

Decrease in trade payables - If the business pays its trade payables early there will be no affect on profit but its bank balance will reduce

Increase in inventory - cash balance reduce when buying inventory, profits increase when it is sold
prepayment of expenses - expenses paid in advance will reduce cash in the year but reduce profits in the next
loan repaid - cash reduces when a payment is made
drawings/dividens paid to owners - paying out drawings reduces cash but no effect on profit

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3
Q

Name some uses to a cash budget?

A

Monitor cash resources
Able to plan future expenditure
Reschedule payments where necessary to avoid bank borrowing

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4
Q

What is meant by the term liquidity?

A

It is the amount of cash a company can obtain quickly to settle debts.

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5
Q

Name some liquid assets that a business might have?

A

Cash - The most liquid
Short term investments which can be sold and turned into cash (Shares)
Trade receivables
All current assets

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6
Q

What is a lagged payment?

A

When cash is paid at a later time to the recording of the purchase or expense

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7
Q

What is working capital?

A

Value of current assets less current liabilities

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8
Q

What is the working capital cycle?

A

The period of time between the outflow of cash to pay for raw materials and the inflow of cash from customers

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9
Q

What is the trade receivables collection period calculation?

A

Trade receivables/revenue x 365

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10
Q

What is the invenotry holding period calculation?

A

Inventory/Cost of sales x 365

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11
Q

What is the trade payables payment period?

A

Trade payables/cost of sales x 365

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12
Q

What are the limitations to using ratios to assess the working capital cycle?

A

Figures extracted from the SFP are a snapshot of a single point in time and may fluctuate due to changing of seasons

The appropriate level of working capital will vary from business to business.

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13
Q

How to work out the working capital cycle using the figures from the ratios?

A

Inventory + Receivables - Payables

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14
Q

What is the effect of a lengthening or shortening working capital cycle compared from one period to the next?

A

Lengthening will slow down cash recpeits
Short will speed up a companys cash recepits and should improve cash balances

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15
Q

If a cash defecit is forecasted how can sources of finance be rasied?

A

From owners in the form of capital
Borrowing from the bank in the form of a loan

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16
Q

What is a hire purchase?

A

Agreement from finance company enables a business to have use of the NCA by a deposit. The company will pay back regular instalment + interest. 3-5 years typically.

17
Q

What happens at the end of the hire purchase?

A

Ownership of the NCA passes from the finance company to the business.

18
Q

What is part exchange?

A

An old non current asset is traded in as part of the purchase of a new non current asset with the balance being paid by cash or borrowing

19
Q

What is meant by inventory holding period?

A

Number of days inventories are held on average, depends on type of business

20
Q

What is meant by trade receivables collection period?

A

How many days on average trade receivables take to pay the business, comparing this to previous years indicates if credit control is more or less efficient

21
Q

What is meant by trade payables collection period?

A

How many days on average the business takes to pay its suppliers

22
Q

What is the importance of liquidity and how to improve it?

A

Insufficient liquidity can make it difficult for a business to trade, settle debts etc
Obtain additional capital from the owners
Raise additional debt finance - loans, hire purchase, overdrafts

23
Q

How to reduce the WCC to improve cash flow?

A

Improve debt collection to reduce trade receivables
Slow down paying suppliers, longer terms
Reduce invenotry to lower inventory days

24
Q

How to reconcile from Profit to Cash for the following:
Injection of funds from a new loan
Loan repayments
Purchase of NCA
Sale of NCA
Capital Introduced
Depreciation
Drawings

A

Injection of funds from a new loan - Add
Loan repayments - Deduct
Purchase of NCA - Deduct
Sale of NCA - Add
Capital Introduced - Add
Depreciation - Add
Drawings - Deduct