Managing Finance and Budgets Seminar 3

Seminar Three - Preparation Read Chapters 5 and 16 Review key concepts: Cash Flow Statement Working Capital Exercises 5.7 (pages 170-1) and 16.3 (page 540)

Seminar 2 - Activities During this seminar we will: Review the key concepts and ideas from the lecture Review Chapter 5 of the set book Examine exercise 5.7 (pages 170-1) Review Chapter 16 of the set book Examine exercise 16.3 (page 540)

Some Starting Points Explain the difference between Cash and Profit. Explain what is meant by the following: Operating Activities Returns from Investment Servicing of Finances Taxation Capital Expenditure Equity Dividends Liquid Resources

The Cash-Flow Statement 1 Describe the structure of the Cash-Flow Statement. State what is meant by the direct and indirect methods of deducing the Net Cash-Flow from the Operating Activities, explaining briefly the difference between them.

Diagrammatic representation of the cash flow statement Equity dividends paid Financing Capital expenditure Returns from investment and servicing of finance Taxation Management of liquid resources Operating activities Cash balance

Standard layout of the cash flow statement plus or minus equals Increase or decrease in cash over the period Net cash flow from operating activities Returns from investment and servicing of finance Taxation Capital expenditure Equity dividends paid Management of liquid resource Financing

The Cash-Flow Statement 2 For the Indirect method of calculating the net cash-flow, state the list of items, taken in order, that you would need to include in your calculations. Exercise 5.7 p 169

The indirect method of deducing the net cash flow from the operating activities plus plus or minus equals Net cash flow from operating activities Net operating profit Depreciation expense Increase (minus) or decrease (plus) in stock Increase (minus) or decrease (plus) in debtors Increase (plus) or decrease (minus) in creditors

Summarising… Describe the relationship(s) between: The Balance Sheet The Cash-Flow Statement The Profit & Loss Account

The relationship between the balance sheet, the profit and loss account and the cash flow statement Balance sheet at the start of the accounting period Owner’s claim Cash Balance sheet at the end of the accounting period Cash flow statement Profit and loss account

Managing Working Capital Explain what is meant by “working capital”, describing some of the elements which affect it. Describe the ‘working capital’ cycle.

The nature and purpose of working capital Major elements Major element Stocks Trade debtors Cash (in hand and at bank) Trade creditors less equals Current liabilities Working capital Current assets

The working capital cycle Cash sales Trade creditors Trade debtors Finished goods Cash/ bank overdraft Work-in-progress Raw materials

Managing Working Capital Describe three financial ratios which can help a manager to monitor the flow of working capital, in relation to: stock levels, debtors and creditors. Exercise 16.3

Managing Stocks Describe the following methods of stock management: ABC system, economic order quantity, materials requirement planning, just-in-time method.

The management of stocks Procedures and techniques Forecasts of future demand Financial ratios Recording and reordering systems Levels of control Stock management models Materials requirements planning (MRP) systems Just-in-time (JIT) stock management

ABC method of analysing and controlling stock Cumulative value of stock items (%) Volume of stock items held (%) A B C

Patterns of stock movements over time Stock level Time

Stockholding and stock order costs Ordering costs Annual costs (£) Total costs Holding costs E Stock level (units)

Managing Working Capital State and describe criteria which can be used to help decide which customers should receive credit.

Which customers should receive credit? The five Cs of credit Capital Capacity Collateral Conditions Character

Comparison of actual and budgeted receipts over time for Example 16.3 % Time 10 20 30 40 June July August September Actual Budgeted

The Operating Cash Cycle Explain what is meant by the Operating Cash cycle, and discuss some methods a manager can use to control it.

The operating cash cycle Purchase of goods on credit Payment for goods Sale of goods on credit Cash received from debtors Stockholding period Operating cash cycle

Calculating the operating cash cycle equals minus Operating cash cycle Average payment period for creditors Average settlement period for debtors plus Average stockholding period

Controlling the cash balance Inner limit Outer limit Target cash balance Cash balance (£) Time (days) 2 8 6 4 9 5 3 1 7 11 12 10