Cash Management and Budgeting Concepts

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Questions and Answers

What is one of the main consequences of not having enough cash to meet required payments?

Higher investment returns

Decrease in operating expenses

Default of payment (correct)

Increased liquidity

What is the primary objective of cash management?

Increase cash reserves for future expansion

Maximize long-term investments

Maintain a minimum level of liquidity while honoring commitments (correct)

Ensure all assets are productive

What does a cash flow budget primarily forecast?

Assets and liabilities

Market trends and investment opportunities

Sales growth and profit margins

Cash inflows and outflows (correct)

What is considered a significant drawback of keeping too much cash on hand?

Opportunity cost for the company Signup and view all the answers

What should companies do to effectively manage large cash requirements?

Minimize and plan cash requirements in advance with banks Signup and view all the answers

What is the primary focus of operating budgets?

Managing day-to-day expenditures and revenues Signup and view all the answers

Which budget is primarily concerned with the cost of raw materials?

Supply budget Signup and view all the answers

The articulation of budgets leads to which of the following financial documents?

Forecast Balance Sheet Signup and view all the answers

What is one of the purposes of the President of Exploit's estimates regarding the operating result?

To finance at least half of the new investments Signup and view all the answers

What does the calculation of production costs assist in determining?

Estimating profitability Signup and view all the answers

Which budget is least likely to be directly connected to the production process?

General and administrative expenses budget Signup and view all the answers

What kind of investment does the President want to limit the need for?

Debt financing Signup and view all the answers

Which component of the budget involves planning for future resource allocation?

Purchases/investments budget Signup and view all the answers

What is the primary concern regarding the seasonality of sales on financial forecasting?

It could have financial consequences. Signup and view all the answers

Which sales quarter in 2019 had the highest sales volume?

Q4 Signup and view all the answers

What is a potential drawback of inventory management related to sales seasonality?

Increased warehouse costs which can be 3% to 20% of inventory value. Signup and view all the answers

Which financial metric is closely associated with the effectiveness of profit analysis?

Return on capital invested Signup and view all the answers

What should not be suggested in a budget program according to best practices?

A program that causes stock shortages. Signup and view all the answers

Which of the following elements is essential for balancing sales, stocks, and production?

Limiting costs of supplies and production. Signup and view all the answers

What is an important consideration regarding fixed costs in budgeting?

They need to be adjusted based on sales volume. Signup and view all the answers

What can result from an ineffective financial structure in a business?

Liquidity problems. Signup and view all the answers

What is the purpose of a short term bank loan in cash flow management?

To maintain cash at desired levels when it falls below zero Signup and view all the answers

Which budget focuses specifically on the management of working capital requirements?

Cash Flow budget Signup and view all the answers

What key parameter affects the cash flow regarding vendor relationships?

Supplier negotiation power Signup and view all the answers

Which of the following does NOT typically affect cash flow management?

Interest rates on long term loans Signup and view all the answers

What is a consequence of managing payment terms ineffectively?

Cash shortages due to timing issues Signup and view all the answers

What is the expected impact of seasonality of sales on the forecasts?

It may lead to cash flow challenges. Signup and view all the answers

When are customers expected to pay based on the provided information?

60 days after the sale. Signup and view all the answers

What percentage of the new tooling line is paid in cash at the beginning of the year?

50% Signup and view all the answers

What is the payment schedule for the remaining balance of the new tooling line?

€84,000 in Q2, €84,000 in Q3, and the rest in Q4. Signup and view all the answers

What type of financing is utilized for the new investments?

Debt financing and cash payments. Signup and view all the answers

Study Notes

Budgets (2/2) - Financial Forecasts

Céline Baud, Penelope Van den Bussche, and Anne Bizière presented on budgets and financial forecasts.
The forecasts cover the 2020-2021 period.

Reminders: Operating Budgets

A summary of operating budgets was discussed.

Articulation of Budgets: Towards the Operating Result

Commercial budget, Sales program, Production budget, Supply budget (raw material), General and administrative expenses budget drive the calculation of production costs and forecast P&L Account.
Purchases/investments budget and other manufacturing costs budget are also part of the operating result forecast.

Articulation of Budgets: Towards the Balance Sheet Forecast (1)

Commercial budget, Sales program, Production budget, Supply budget (raw material), General and administrative expenses budget are inputs into the calculation of production costs and forecast P&L.
Purchases/investments budget, Other manufacturing costs budget, and Inventories are included in the forecast for the balance sheet.
The balance sheet forecast includes fixed assets, and net income.

Budgets over Different Periods

The president of Exploit wants refined forecasts, especially considering seasonality which influences sales.
Sales estimates for 2019: Q1 - 10,000 units, Q2 - 10,000 units, Q3 - 15,000 units, Q4 - 25,000 units.
This data has an impact on operating forecasts.
Impact of choices and methods on the result:
- Inventory valuations (methods and periodicity)
- Fixed cost allocation (proportional or not).
Balancing Sales, Stocks, Production and Purchases:
- Limiting stock levels; warehouse costs up to 3-20% of inventory value.
- Budget programs should avoid being out of stock or exceeding production/storage capacity.

Financial Budgets and Their Roles

Different aspects of financial budgets and their roles in decision making were discussed.

Role of Financial Budgets

Profit analysis (margins, cost of goods sold) & Return on Capital Invested (ROI, residual profit)
Medium/long-term financial needs, including fixed assets, management of work-in-progress, debt ratios, leverage and solvency.
Short-term financial needs (cash management)

Cash Flow Budget

All forecasts concerning receipts & payments fall under the definition of a cash flow budget.
Inflows (received), payments (outflows), Change in cash, Opening cash & Closing cash are all important components of the cash flow.
The cash budget structure should be simple; inflow and outflow items must be clearly identified.
If cash balance falls below a desired minimum, a short-term bank loan may be needed.

Articulation of Budgets: The Cash Flow Budget

Commercial budget, Sales program, Production budget, Supply budget (raw material), General and administrative expenses budget and related items such as workforce budget, calculation of production costs influence the cash flow.

Cash Flow Budget and Cash Requirements

Payment policies and negotiation power with customers and suppliers are parameters of cash flow.
Inventory turnover rate is important in managing working capital.
Payment terms for taxes, duties, and social security charges influence cash flow.
Investments policy and financing policy (financing investments and repaying current loans) are critical to cash requirements.
Be wary of factors like sales/purchases on credit and deferred tax payments; loan repayment has to be taken into account.

Articulation of budgets: The Cash Flow Budget (Part 2, Question 2)

Exploit's president wants a refined cash flow budget and complete balance sheet.
Customer payment terms are 60 days, evenly distributed.
Raw material payments are 90 days.
Investment made at year start; 50% of new tooling financed through loan.
The remaining 50% is paid out over Q2, Q3, and the rest of Q4.

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Description

Test your understanding of cash management and budgeting concepts with this quiz. Explore the implications of cash flow forecasts, resource allocation, and the impacts of budget articulation on financial documents. Perfect for finance students and professionals looking to refine their knowledge in this crucial area.