Session 9 - Cash Budgetng and resources ratios Flashcards
What is a cash budget?
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
List 7 reasons as to why a business can be making a profit but it’s bank balance is reducing?
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
Name some uses to a cash budget?
Monitor cash resources
Able to plan future expenditure
Reschedule payments where necessary to avoid bank borrowing
What is meant by the term liquidity?
It is the amount of cash a company can obtain quickly to settle debts.
Name some liquid assets that a business might have?
Cash - The most liquid
Short term investments which can be sold and turned into cash (Shares)
Trade receivables
All current assets
What is a lagged payment?
When cash is paid at a later time to the recording of the purchase or expense
What is working capital?
Value of current assets less current liabilities
What is the working capital cycle?
The period of time between the outflow of cash to pay for raw materials and the inflow of cash from customers
What is the trade receivables collection period calculation?
Trade receivables/revenue x 365
What is the invenotry holding period calculation?
Inventory/Cost of sales x 365
What is the trade payables payment period?
Trade payables/cost of sales x 365
What are the limitations to using ratios to assess the working capital cycle?
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.
How to work out the working capital cycle using the figures from the ratios?
Inventory + Receivables - Payables
What is the effect of a lengthening or shortening working capital cycle compared from one period to the next?
Lengthening will slow down cash recpeits
Short will speed up a companys cash recepits and should improve cash balances
If a cash defecit is forecasted how can sources of finance be rasied?
From owners in the form of capital
Borrowing from the bank in the form of a loan
What is a hire purchase?
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.
What happens at the end of the hire purchase?
Ownership of the NCA passes from the finance company to the business.
What is part exchange?
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
What is meant by inventory holding period?
Number of days inventories are held on average, depends on type of business
What is meant by trade receivables collection period?
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
What is meant by trade payables collection period?
How many days on average the business takes to pay its suppliers
What is the importance of liquidity and how to improve it?
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
How to reduce the WCC to improve cash flow?
Improve debt collection to reduce trade receivables
Slow down paying suppliers, longer terms
Reduce invenotry to lower inventory days
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
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
