Managing Cash Balance
CASH SURPLUS
CLEAR FUND FORECAST
The purpose of a cleared cash funds forecast is to
asses whether the business will have enough cleared funds in its account
to meet payment obligations, allowing for any overdraft facility that
the business may have. Only cleared funds are available for payments
because receipts or payment that have not yet been cleared (float) do
not affect the available account balance.
Required return = Return on bond
Bond valuation
Gross redemption yields =
(Interest on maturity + Par value at maturity)
Cost of bond
Primary Bank.: It is a high street bank, its operates the payment mechanism and it called Commercial Bank.
Secondary Bank: This banks deals mostly with wholesale business in the secondary money market.
Central Bank: This bank mostly important for monetary policy. The main instrument of monetary policy is the use of interest rate.
Financial Instrument:
Deposits, Bills, Certificate of Deposit (CD), Commercial Paper
Treasurer
Function:
* Advising on capital structure
* Managing cash flows to minimise associated cost.
* Maintaining good banking relationship.
* Managing foreign currency transaction to avoid risk.
CASH SURPLUS
Where a forecast indicates an excess of equity and liabilities over assets, the business is expecting a cash surplus.
CLEAR FUND FORECAST
It indicates whether it will have sufficient cash to pay.
WORKING CAPITAL:
CURRENT ASSET:
INVENTORY :
RAW MATERIALS XXX
WORK IN PROGRESS XXX
FINISHED GOODS XXX
TOTAL XXX
RECEIVABLE XXX
XXX
LESS:
CURRENT LIABILITY :
PAYABLE XXX
WORKING CAPITAL XXX
WORKING CAPITAL MANAGEMENT SOME FORMULA
PAYABLE DAYS = AVG. TRADE PAYABLE X 365
O/H PAID IN CREDIT
RECEIVABLE HOLDING DAYS = AVG. TRADE RECEIVABLE X 365
CREDIT SALES
INVENTORY DAYS = AVG. WORK IN PROGRESS X 365
COST OF PRODUCTION
INVENTORY GOODS = INVENTORY X 365
COST OF SALES
RAW MATERIALS = RAW MATERIAL INVENTORY X 365
MATERIAL PURCHASE
CASH OPERATING CYCLE:
RECEIVABLE DAYS + INVENTORY DAYS - PAYABLE DAYS
HERE INVENTORY DAYS INCLUDING FINISHED GOODS, WORK IN PROGRESS AND RAW MATERIALS.
SYMPTOMS OF OVER TRADING
* INCREASE REVENUE
* INCREASE INVENTORY
* INCREASE NON CURRENTS ASSET
* INCREASE PAYABLE AND LOAN FINANCE
* REDUCE LIQUIDITY RATIO
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