Techniques to Managing Finances

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CAT Paper T10 Managing Finance
Written By: Seah

Chapter 1 Cash and cash flows Chapter 2 Forecasting cash flows Chapter 3 Cash forecasting techniques Chapter 4 Cash and treasury management Chapter 5 Investing surplus funds Chapter 6 Working capital management Chapter 7 Managing payables and inventory Chapter 8 Managing receivables Chapter 9 Assessing creditworthiness Chapter 10 Monitoring and collecting debts Chapter 11 The banking system and financial markets Chapter 12 Economic influences Chapter 13 Short and medium-term finance Chapter 14 Long-term finance Chapter 15 Financing of small and medium-sized enterprises Chapter 16 Decision making Chapter 17 CVP analysis Chapter 18 Capital expenditure budgeting Chapter 19 Methods of project appraisal 2 3-5 6 7 8-9 10-11 12-13 14-16 17-18 19-20 21-22 23-24 25-27 28-32 33-34 35-37 38-39 40-41 42-45

Key areas of syllabus are source of finance (chapter 11-15), cash budgets (chapter 2), working capital management (chapter 6-7), credit management (chapter 8-10), capital investment appraisal (chapter 19) and short-term decision making (chapter 16-17). Small areas must still be considered to maximize chances of success (not only pass). Written By: Seah 2

Chapter 1 Cash and cash flows A business which fails to make profits will go under in the long-term. However, a business which runs out of cash, even for a small period, will fail although it is profitable. Account showing trading profits are not the same as statement of cash flows as account is prepared under accrual accounting (earning basis). Cash budgets will be prepared under cash accounting (receipt and payment basis), only items that involve cash flows will be included. Cash transactions can be capital or revenue, exceptional (unusual) or unexceptional and regular or irregular. Cash flow can be defined in many ways: Net cash flow – total change in cash balances Operational cash flow – net cash flow from trading activities Priority cash flows – not relate to trade but important for continuing operation, eg. interest payments and tax payments. Discretionary cash flows – cash flows that do not have to be made. Financial cash flows – cash flows from long-term capital. You should have knows the meaning of accrual concept, but when planning for the use of cash, we will use cash accounting. Advantages of cash flow accounting are: (i) Potential lenders are more interested in company’s ability to repay them (liquidity) than its profitability. (ii) Satisfies the needs of other financial report users better. (iii) Cash flow forecasts are easier to prepare, as well as more useful than profit forecasts. For cash accounting, you have to watch out for timing differences between sales being made and cash being received, and purchases/expenditure and cash payments.

Written By: Seah


Chapter 2 Forecasting cash flows – Important! The main purpose of preparing budgets is to measure whether there are likely to be cash shortages or large surpluses. Cash flow forecasts provide an early warning of liquidity problems and funding needs. Liquidity = company’s ability to repay debts/cash position. A cash budget is a detailed forecast of expected cash receipts, payments and balances over a budget period. If you see budget profiling in exam, it means process of preparing a budget. In exam, you may be asked to prepare a cash budget for six months and this will take some time, you must remember to read the information carefully and ignore non-cash items such as depreciation and profit on disposal (but include cash received from disposal). The timing is important, for example a new delivery vehicle was brought in June and the cost of $8000 is to be paid in August, then you should record $8000 in August. Sometime question may give you mark-up or margin and you are required to use it to find out the amount of purchases (take note that you don’t record the full amount in the month, you only record the amount actually paid). A good...
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