Mô tả:
11/20/2009
The cash cycle
Payables
Cash and cash flows
Raw materials
Cash
Work in progress
Receivables
Examples of cash outflows
Finished goods
Examples of cash inflows
• Payments to suppliers
• Cash from cash customers
• Wages and salaries
• Cash from credit customers
• Dividends
• Proceeds from new share issues
• Interest on loan notes and bank overdrafts
• Loan advances
• Purchases of new assets
• Sales of assets
Profits and cash flows are different
• Cash is received from non-trading transactions
•
eg loan advances
Forecasting cash flows
• Cash is paid for non-trading items
•
eg purchases of assets
• Income statements include non-cash items
•
eg depreciation
• Income statements are based on accruals concept
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Forecasts estimate
Why is cash forecasting necessary?
• To forecast cash shortages (to borrow)
• How much is required
• To forecast cash surpluses (to invest)
• When it will be required
• For control purposes (actual v budget
comparison)
• How long it will be required for
• Whether it will be available from anticipated
sources
Cash budget guidelines
Cash budget – Receipts and payments
format
• Cash receipts
•
•
•
•
Establish sales volume/price
Calculate credit/cash sales
Adjust for early payment discount
Add one-off or irregular cash receipts
• Cash payments
•
•
•
•
•
Establish purchases volume/price
Calculate credit/cash purchases
Adjust for early payment discount
Add other regular payments, eg wages
Add one-off or irregular cash payments
Cash receipts
Sales receipts
Issue of shares
X
Cash payments
Purchase payments
X X
Wages
X
Purchase of non-current assets
Dividends
Cash surplus/(deficit)
Cash balance, beginning
Cash balance, ending
X
X
X
Jan
Feb Mar
X
X
X
X
X
X
X
X
X
(X)
X
(X)
X
X
X
X
X
(X)
X
X
Tools for forecasting cash flows
• Index =
Value in year
Value in base year
X 100%
Cash forecasting techniques
• Sensitivity analysis
• Time series analysis
• Seasonally adjusted data
• Additive model
Y=T+S+I
• Multiplicative model Y = T x S x I
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The focus of cash management
Cash and treasury management
Profitability
Liquidity
Safety
The role of the treasurer
Corporate
objectives
Liquidity
management
Others, eg tax
Investing surplus funds
The Treasurer
Corporate
finance
Funding
management
Currency
management
Where to invest surplus funds?
• Bank and building society accounts
• Gilts – shorts, mediums, longs, undated, indexlinked
• Local authority stocks
• Certificates of deposit
• Bills of exchange
• Shares
• Loan notes
• Bonds
• Commercial paper
Risk and exposure
• Risk may affect an investment’s income,
capital or both
• Most risky
Ordinary shares
• Least risky
Government backed investments
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Working capital
Current assets
Working capital management
• Cash
• Inventory, WIP and finished goods
• Trade receivables
Current liabilities
• Trade payables
• Short-term loans
• Taxation
Liquidity ratios
•
•
•
•
•
Current ratio
Quick ratio
Accounts receivable payment period
Inventory turnover period
Accounts payable period
Over-capitalisation
• Definition –
Excessive investment in
working capital
Lose out on investment
income
Overtrading
Increasing
Managing payables and inventory
revenue
Falling
current
Increasing
& quick
assets
ratios
SYMPTOMS
Current liabs
Inventory &
>
receivables
Current assets
> Sales
Assets
financed
by debt
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Methods of paying suppliers
•
•
•
•
•
•
•
Managing inventory
•
•
•
•
Cash
Cheque
Standing order
Direct debit
Telegraphic Transfer (TT)
BACS
CHAPS
Holding costs
Procuring costs
Shortage costs
Cost of goods and supplier discounts
Economic order quantity model
EOQ =
2C0D
CH
Co = ordering cost
for units
Safety inventory
D = demand
Q
Q
Average inventory
Average inventory =
= S + Q/2
Q/2
Ch = holding costs
S
=
the optimal ordering quantity
for an item of inventory which
minimises costs
0
time
time
Just in time (JIT)
Managing receivables
Inventory
suppliers
staff
quality
lead times
0
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Credit control
Overall policy
Credit control
policies
Overall policy
Procedures for
offering credit
Overall policy
Credit control
Not to offer credit
Procedures for offering credit
Review account
information
Total credit is
limited to x%
of sales
Credit control
Procedures for
offering credit
Obtain references
Offer credit to
specific customers
only
Credit control
Customer visits
Formal agreement
Complies with
legislation
Probationary
period
Settlement terms
Receivables
ageing reports
Settlement discounts
• Worthwhile if the benefit from offering the
discount exceeds its cost
• Benefit = profit from investing the amount
collected early
• Cost
= percentage discount on amount
owed
Chasing slow
payers
Elements of a contract
Offer
Acceptance
Agreement
Intention
Consideration
Contract
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Assessing creditworthiness
Aim = Minimise bad debts but maximise sales
Assessing credit worthiness
• Only sell to reliable customers
• Process credit sales efficiently
• Ensure cash is collected promptly
Sources of credit information
External sources
• External sources
Bank
references
– Generated by third parties
Company
accounts
• Internal sources
– Generated by the company
County court
records
Trade
references
External
sources
Companies
registry
Credit ratings
Credit bureaux
Newspapers
Internal sources – Ratio analysis
•
•
•
•
•
•
Profit margin
Asset turnover
ROCE
EPS/PE
Working capital ratios
Gearing, interest cover, debt ratio
Monitoring and collecting debts
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11/20/2009
Managing receivables
Insolvency
• Liquidation
• Factoring
=>3 Services
– Compulsory or voluntary winding up of the company.
– Outsource credit control
– Bad debt protection
– Advance payment
Charge % turnover
• Receivership
Charge fee
– Creditors call in the receiver to run the business.
Charge interest
• Administration
Sell a selection of invoices:
INVOICE DISCOUNTING
– Protection from liquidation while an insolvency
practitioner seeks a good resolution for all.
Any combination of 3 services
Financial institutions
The banking system and financial
markets
Financial intermediaries
Investors
Financial markets
Increasing
risk
Financial intermediary
Company
Money markets
disintermediation
Investors
Merchant banks
Pension funds
Insurance companies
• Bills of exchange
• Commercial paper
• Certificates of deposit
• Treasury bills
Company
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Euromarkets
Economic influences
Eurocurrency = a deposit of funds with a bank outside of the
currency’s country of issue
Economic influences
• Interest rates
– Nominal vs real rates
Short and medium-term finance
• Inflation
– Redistribution of wealth
– Effect on prices
• Government control over money supply
– Monetary policy
Short-term finance
•Matching approach
• Types
– Trade credit
– Overdraft
– Loans
– Leasing
Leasing
• Lessor
• Lessee
end
start
Operating lease
Finance lease
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Operating and finance leases
Operating lease
• Lessor supplies the equipment
Finance lease
• Lessee responsible for
maintenance
• Lessor responsible for
maintenance
Banks’ criteria for lending
•
•
•
•
•
•
•
Character of the customer
Ability to borrow and repay
Margin of profit
Purpose of the borrowing
Amount of the borrowing
Repayment terms
Insurance against possible non-payment
Long-term finance
Long-term finance
• Used for major investments
• Usually more expensive and less flexible
• Types
– Retained earnings
– Debt
– Equity
– Venture capital
– Government aid
Equity finance
Access to
wider pool of
finance
Higher public
profile
Better position to make
a takeover bid
Why seek a stock market
listing?
Higher investor
confidence due to
greater scrutiny
Allows owners to realise
some of their
investment
Debt finance
Bank loans
Bonds / loan notes
• Many types
• Sold to investors
• Often secured
• Secured / covenants
• Loan covenants
• Types
– Redeemable
– Irredeemable
– Floating rate
– Deep discount
– Convertible
– Zero coupon
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Small & medium-sized enterprises
Financing of small and mediumsized enterprises
• Strong competition for investment capital
• Lack of track record
• Perceived as high risk
• Few assets for security
• Robust business plan required
Sources of finance for SMEs
•
•
•
•
•
•
•
•
Owner finance
Overdraft/bank loans
Trade credit/debt factoring
Equity
Leasing
Government aid
Venture capital
Business angels
Decision making
Relevant Costs
Relevant cost - materials
• What is a relevant cost?
FUTURE
INCREMENTAL
CASHFLOW
Only cash
Only future costs are
affected by our
decision
i.e. incurred as a
direct result of our
decision
Not in inventory
In inventory
In continual
use
No other
use
Scarce
If taken from
inventory it
will have to
be replaced
If taken from
inventory it
won’t have to
be replaced
If taken from
inventory it
can’t be
replaced
Relevant cost
= current
purchase
price
Relevant cost
= scrap value
foregone
Relevant cost
= opportunity
cost
Just have to
buy it
Relevant cost
= current
purchase
price
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11/20/2009
Relevant cost - labour
Shutdown decisions
Labour
Could hire
more
Spare
capacity
Relevant cost
= current
rate of pay
Relevant cost
= nil
The only fixed costs which are relevant are avoidable fixed costs
Full capacity
Relevant cost
= opportunity
cost
Sales15,000
Variable cost
Cont’n
Fixed cost
Profit
A
10,000
8,000
7,000
(4,000)
3,000
B
8,000
6,000
4,000
(3,000)
1,000
C
5,000
3,000
(4,000)
(1,000)
Introduction
CVP analysis
So we will break even when…
Contribution = Fixed costs
Cont’n/unit x Q = Fixed costs
Fixed costs
Q = __________
Cont’n/unit
Breakeven Revenue – C/S Ratio
Margin of safety (in units) =
B/E Revenue = BEP x SP/unit
B/E Revenue =
Fixed costs
__________
x SP/unit
Fixed costs
Budgeted sales volume – breakeven sales volume
OR
Cont’n/unit
B/E Revenue =
Margin of safety
÷
Cont’n/unit
_________
Margin of safety (as %) =
SP/unit
Budgeted sales volume – Break even sales volume
B/E Revenue =
costs
_Fixed
_________
X 100
Budgeted sales volume
C/S ratio
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11/20/2009
Required profit level
Breakeven chart
$
TR
$40,000
Sales volume to reach required profit
level
=
Fixed costs
+ required profit
______________________
Profit
TC
$38,200
$30,400
Contribution/unit
Fixed
cost
3,800
5,000
Q
Margin of safety
Profit volume chart
Profit
$1,800
Capital expenditure budgeting
$0
3,800
5,000
Q
Margin of safety
($5,700)
Capital expenditure
• Capital expenditure acquires non-current
assets or improves their earning capacity
• Non-current assets include: Car; machinery;
property….
Revenue expenditure
• Revenue expenditure is incurred for the
purposes of the trade
– Raw materials
– Marketing costs
– Administration expenses
– Finance charges
– Maintaining the earning capacity of non-current
assets
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11/20/2009
Steps in project appraisal
Investigation
Methods of project appraisal
Detailed evaluation
Authorisation and implementation
Monitoring and post-completion audit
ARR / ROI
Payback
Est average profits
Est average investment
X 100%
Advantages?
Advantages?
Disadvantages?
The time it takes the cash inflows from a project
to equal the cash outflows
Advantages?
Disadvantages?
Time value of money
Cash received in one year’s time is not
worth the same as cash received today
Future cash flows need to be discounted
Net Present Value
If the discounted future cash flows >
cost of setting up the project today
The project has a + net present value (NPV)
Annuity:
Cost of capital:
A constant cash
flow for a
number of years
• Cost of funds
• Minimum return
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11/20/2009
Internal rate of return
Disadvantages of IRR
•
Multiple IRRs
•
Mutually exclusive projects
•
Unfamiliar/confusing
•
Reinvestment assumption
= The % return given by a project
1. NPVA (+ve) of the project at a%
2. NPVB (-ve) of the project at b%
3. Use the formula
IRR = a +
NPVA
x (b - a)
NPVA - NPVB
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