Cash Management. Lecture Outline Importance of Cash Budgets How to Prepare a Cash Budget Debt vs. Equity Finance Preparation of a Loan Schedule Nominal.

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Presentation transcript:

Cash Management

Lecture Outline Importance of Cash Budgets How to Prepare a Cash Budget Debt vs. Equity Finance Preparation of a Loan Schedule Nominal vs. Effective Interest Rates

Cash Budgets Defined An estimate of future cash receipts and outlays in order to determine the cash position of an individual/business at a pre- determined time in the future. Devise used for both; 1. Planning and 2. Control

Cash Budget Planning Enables an individual/business to view their likely cash position in the future. By identifying the future cash position an individual/business can determine how much it can afford to invest today.

Cash Budget Control ‘Control’ in an accounting sense refers to the minimisation of costs. Preparing a cash budget includes all expenditure and highlights areas for potential savings. At the end of a pre-determined period (ie a month or quarter), actual expenditure is compared to the estimated expenditure to identify any major discrepancies.

Cash Budget Control Cash Payments BudgetActualVariance Food (260) Negative variance could be due to: –Poor Estimates (this will impact on planning) –Inefficiency

Debt Management Methods of Finance 1. Equity Financing –Additional investment from owners. Sole Trader:Owner contributes more money. Partnership: Partners contribute more money and/or admit a new partner(s). Company: Issue more shares. 2. Debt Financing –Borrowing money. –Increases the level of financial risk.

Financial Risk The risk of defaulting on an interest payment. The more funds that are borrowed, the greater the financial risk.

Financial Risk Loans Interest Payments Risk of Default Risk of Failure

Debt Management To minimise the level of financial risk and in-turn reduce the risk of failure, it is therefore necessary to manage debt levels effectively.