Managing Finance & Budgets

1. Managing Finance & Budgets Lecture 3 Follow-Up Activities and Solutions

2. Activity One Discuss the immediate effect of the following activities on: a) Profit and b) Cash • Repaying a loan • Making a sale on credit • Buying a fixed asset for cash • Receiving payment from a trade debtor • Depreciating a fixed asset • Buying some stock with cash • Making a share issue for cash

3. Activity One: Solution Repaying a loan: Profit: • This has no effect. (Profit = turnover – costs). Cash • This reduces our cash by the amount repaid.

4. Activity One: Solution Making a sale on credit: Profit: • This increases profit, since we have increased turnover. Cash • This has no effect. No money changes hands.

5. Activity One: Solution Buying a fixed asset for cash: Profit: • This has no effect. Assets are not part of the profit equation. Cash • This reduces our cash.

6. Activity One: Solution Receiving cash from a trade debtor: Profit: • This has no effect on profit, as we have already counted this sale in our turnover figures. Cash • This increases our cash.

7. Activity One: Solution Depreciating a fixed asset: Profit: • This decreases our profit, since it is part of our indirect costs. Cash • This has no effect. No money changes hands.

8. Activity One: Solution Buying some stock for cash: Profit: • This has no effect on profit, since we only account for this when we sell it. Cash • This reduces our cash.

9. Activity One: Solution Making a Share Issue for Cash: Profit: • This has no effect on profit, since capital is not part of the profit equation. Cash • This increases our cash.

10. Activity Two Which direction (in or out) would you normally expect the net cash-flow to be for the following: • Operations • Returns from investments and servicing of finance • Taxation • Capital expenditure • Equity Dividends • Management of liquid resources • Financing

11. Activity Two Direction of net cash-flow normally: • Operations IN • Investments/ servicing of finance OUT • Taxation OUT • Capital expenditure OUT • Equity Dividends OUT • Management of liquid resources EITHER • Financing EITHER

12. Activity Three Discuss the following: • What are the advantages and disadvantages of keeping stock value as low as possible? • What are the advantages and disadvantages of the JIT system of Stock Control?

13. Activity Three Low Stock Levels: • Advantages – Low cost, low overheads in terms of storage space, staff needed to secure and maintain, low depreciation costs. • Disadvantages – may run out, lose sales & long term custom

14. Activity Three JIT system of Stock Control • Advantages – low overheads in terms of storage space, low depreciation costs. • Disadvantages –difficult to maintain continuity of supply. Suppliers may increase prices

15. Activity Four Discuss the following: • Why is there potential for conflict between the credit control department and the sales department of an organisation?

16. Activity Four Potential conflict between credit control and sales. • Sales will wish to improve sales figures by making sales to anyone. It will not be in their remit to worry about when or if the customers actually pay. Sales defines a good customers as one who orders large amounts. • Credit control will be keen to improve their performance by ensuring that customers pay, and pay promptly. CC defines a good customer as one who pays on time.

17. Activity Five Discuss the following: • A supplier’s normal credit terms are 70 days. They offer a 2% discount for payment in 30 days. What is the approximate annual percentage cost of not taking up the discount? • Is it reasonable to compare the above figure directly to the cost of capital for the organisation when deciding to take up the offer or are there other factors which should be taken into account?

18. Activity Five • A supplier’s normal credit terms are 70 days. They offer a 2% discount for payment in 30 days. What is the approximate annual percentage cost of not taking up the discount? • Suppose the amount is £100. We would gain 40 days’ worth of credit. If we assume that the money is sitting in the bank, earning interest, it would gain at most, say ½% at current levels (i.e. £0.50). • On the other hand, if we paid in 30 days, we would save 2%, which is £2.00. • The net saving is £1.50, which if we did this every month, would save us 12 x £1.50 =£18, or 18% of our monthly cash outlay.

19. Activity Five • Is it reasonable to compare the above figure directly to the cost of capital for the organisation when deciding to take up the offer or are there other factors which should be taken into account? Other factors to be considered: • Is there cash currently available? • Would the cash have been more profitably employed elsewhere? • Ifs there a better offer on other goods purchased by the company? • Is there somewhere that the cash can be invested which would give more than 2% over the 40 days?

20. Activity Six Discuss the following: • Why is it important to keep careful track of working capital requirements?

21. Activity Six The need to keep track of working capital requirements: Failure to do so could lead to: • Debts not being collected on time, possibly with customers defaulting on payments. • Suppliers refusing credit, or even refusing to supply. • Stock not being available for manufacturing and other processes. • Payments to employees being delayed or impossible. • Bankruptcy.