What is a sign on overtrading?
- rapidly increased sales
- falling profit margins
- inability to collect debts promptly
- reduced cash balances
- increase in overdraft
- delaying payments to suppliers
What is a remedy for overtrading?
- Reduce sales to a manageable level
and/or
- increase resources through increased capital
When does overtrading occur?
Overtrading occurs when a business expands rapidly and then has insufficient working capital and cash to support the increased trade.
What is overcapitalism?
Overcapitalisation is the opposite of overtrading. It involves having more resources tied up in working capital than is needed.
What is the sign of overcapitalism?
- high level of inventory, receivables and cash
- payments being made to suppliers before they are due
What are the remedies of overcapitalism?
- improved management of working capital
- using spare resources for profitable investments
- repayment of any
unnecessary loans
How do you work out average annual change?
Number of years - 1
How do you work out index numbers?
current cash flow x future index/current index = future cash flow
What are the benefits of forecasting?
- Identifies possible opportunities to invest surplus funds
- Identifies what cash may be required at certain times – liquidity issues
- Ensures a systematic approach is taken to create receipts and payments
- Can be used to ‘test’ impact of negotiations with suppliers and customers e.g. credit terms offered by suppliers or to customers
What are the limitations of forecasting?
- Assumptions made on historical information
- It assumes that everything continues as normal, i.e. the business will continue to grow or price to reduce.
- Is the data used reliable
- The volume of data available
- Does not allow for unforeseen events, i.e. boom or bust
- Does not take into consider the product life cycle
How will a settlement discount affect cash flow?
- A business may offer a settlement discount on its sales, this will affect the amount of cash inflow from sales on credit.
- Customers who take up the discount will pay earlier but pay less, so it will impact upon the cash inflow in two ways.
When do we normally pay our corporation tax bill?
9 months and one day after year end or quarterly payment on account
What is sensitivity analysis?
Sensitivity analysis helps us to determine which assumptions are critical and which have less impact.
Sensitivity analysis is a technique that investigates the impact that changes will have on the budget, so that the organisation can be made aware of how the situation can vary from the projected position.
In what instances is early settlement discount used?
Be offered to encourage our customers to pay us earlier.
Be offered by our suppliers so that we pay earlier.
What is the budget cycle?
Plan
Monitor
Control
What are some actions we could take if the labour costs increase?
increase labour efficiency
reduce absenteeism
reduce overtime working
negotiate flexible contracts
What are some actions we could take if purchase price increased?
change suppliers
negotiate better prices
What are some actions we could take if payments are made prematurely?
negotiate longer credit term
ensure available credits taken in full
What are some actions we could take if purchase volumes increase?
improve stock control
reduce wastage
What are some actions we could take if sale volume reduce?
improve product
improve marketing
reduce selling price
What are some actions we could take if receipts from cash sales are delayed?
improve credit control
offer discount for prompt payment
What functions do the bank of england carry out?
- The banker to the Government.
- Banker to other banks.
- Responsible for note printing, gold and foreign currency reserve.
- To help influence interest rates in the economy with the aim to control inflation.
What is the UK Money markets?
This is a market for borrowing money and investing money, again at a cost in the form of an interest rate.
What is the interbank market?
One of the major sterling money markets is the interbank market which involves banks and other large institutions lending to each other over short periods.
