Cash Management

Sharon Yates
Flashcards by Sharon Yates, updated more than 1 year ago
Sharon Yates
Created by Sharon Yates over 5 years ago


AAT level 4 cash management

Resource summary

Question Answer
What are the signs of overtrading? Overtrading when company expands too quickly Sales increase quickly Falling profit margin as reductions given to increase sales & production costs rise Longer Receivables Collection period Overdraft
How can you control overtrading? Dangerous if not managed Issue new share capital or loan stock Take out loan rather than overdraft Control receivables and payables Slow down expansion
What is over-capitalisation? Opposite of overtrading Too much cash Profit low in relation to capital invested If profit can't be reinvested should be distributed to shareholders as dividends or buyback shares
What is the role of the treasury function in a business? To manage short/long term cashflow Invest surplus funds Raise finance Earn reasonable return for reasonable risk
What policies can the Government use to affect the economy? Fiscal Policy - tax and spending plans Monetary Policy - management of money supply, currency in circulation & in the economy
What is monetary policy? Government spending & taxation plans Government want stable economy & will change tax / interest rates to balance boom/bust Involves changing of interest rates Varying the amount of money that banks need to keep in reserve
Who controls the interest rates and what happens when interest rates are low? Bank of England When interest rate are low Money less expensive to borrow - people spend more Business can create employment or expand Creates inflation
What is inflation? Rise in the price of goods & services with an economy over time. Reduces purchasing power of money Each £ buys less goods/services
What is the effect of high inflation? Prices rise Consumers buy less goods Reduced growth in economy Employees want pay rises to match price rises, especially hard for fixed/low incomes Prices rise for businesses Consumer confidence damaged
What happens if interest rates are high? Money more expensive to borrow Higher level of saving or investing Gov will reduce inflation rates to encourage people to spend Cost of capital for investments high so businesses may invest surplus funds for higher return
What is quantitative easing? A monetary policy where B of E buys financial assets (gov & corp bonds) using money it has generated electronically. In theory the central bank has printed itself more money (not printed) so more money in economy. Can cause inflation
what is the banking system & intermediaries? People with surplus funds to invest need to match up with people who need funds. Intermediaries bring them together Risk reduced Flexibility better Maturity transformation
what is debt factoring? Arrangement where a debt factoring company purchases the trade receivables as they arise They pay the business up to 80% of the value of the invoices Fee charged Balance paid when invoice settled Can be with or without recourse
What is with recourse? What is without recourse? With recourse factoring is when the business is liable to the factoring company if a debtor defaults. Without recourse factoring means that the factor takeover all responsibility for bad debts as well as collected amounts
What is invoice discounting? Service provided by factoring companies Debts assigned as arise Discounting usually for selections of invoices Up to 75% value advanced Payments forwarded to factoring company when business receives them Debt collection done by company
What is convertible loan stock? A debenture loan of a company which can be converted by the holder at some point in the future into equity shares of the company Within a given time period
What are bonds? Loans can be broken down into smaller units Bonds have a face value - par Issued by companies, local authorities & gov
What are corporate bonds? Issued by companies to raise funding for projects Used to replace bank finance Have nominal value, coupon rate %, redemption terms Interest is nominal value x % rate Can be sold on open market
What do we consider when choosing type of finance or investment? Cost - interest, fees, redemption penalties Timescale - how long Security - fixed, floating charges Impact on gearing
Interest rate types Base rate - set by B of E, lowest bank will charge Fixed - unchanging Variable - changes in line with base rate Flat rate - does not account for repayments Capped rate - rate has upper limit Simple - total interest as % of principal APR - annual % rate
What is gearing? Total debt (short + long term)/ total debt + equity measures capital structure is it funded by equity or debt? If lots of debt riskier as payable when banks want it
Investment strategy considerations Size of funds Time Certainty Return v risk Liquidity of investment Early redemption Realisation/maturity
Calculating the yield on bonds How do you calculate the interest yield? Annual interest receivable /market price x 100 eg 7% stock, market price 103.80 interest yield 7/103.80 x 100% = 6.7%
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