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

Managing Finance & Budgets

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Managing Finance & Budgets. Lecture 3 Follow-Up Activities and Solutions. 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 - PowerPoint PPT Presentation

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Page 1: Managing Finance & Budgets

Managing Finance & Budgets

Lecture 3 Follow-Up

Activities and Solutions

Page 2: Managing Finance & Budgets

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

Page 3: Managing Finance & Budgets

Activity One: Solution

Repaying a loan:

Profit: This has no effect. (Profit = turnover – costs).

Cash This reduces our cash by the amount repaid.

Page 4: Managing Finance & Budgets

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.

Page 5: Managing Finance & Budgets

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.

Page 6: Managing Finance & Budgets

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.

Page 7: Managing Finance & Budgets

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.

Page 8: Managing Finance & Budgets

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.

Page 9: Managing Finance & Budgets

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.

Page 10: Managing Finance & Budgets

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

Page 11: Managing Finance & Budgets

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

Page 12: Managing Finance & Budgets

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?

Page 13: Managing Finance & Budgets

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

Page 14: Managing Finance & Budgets

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

Page 15: Managing Finance & Budgets

Activity Four

Discuss the following:

Why is there potential for conflict between the credit control department and the sales department of an organisation?

Page 16: Managing Finance & Budgets

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.

Page 17: Managing Finance & Budgets

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?

Page 18: Managing Finance & Budgets

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.

Page 19: Managing Finance & Budgets

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?

Page 20: Managing Finance & Budgets

Activity Six

Discuss the following:

Why is it important to keep careful track of working capital requirements?

Page 21: Managing Finance & Budgets

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.