Assessment 2 (1)

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Maseno University *

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Finance

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Nov 24, 2024

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Assessment 2 Financial Management 2 Part A 1. Cash flow management. Cash flow management refers to control and analysis of cash inflow into a business and cash outflow from a business. Cash flow management helps to predict a company’s survival by analyzing its liquidity situations. Managing cash flow enables a company to forecast the potential cash in hand at any time, trends in cash flow, and assess the likelihood of a cash shortfall or surplus occurring in the future. 2. Two important benefits of cash flow management  Cash flow management enables businesses to anticipate potential future cash problems they are likely to encounter by enabling approximation of future cash inflows and cash outflows.  Proper cash flow management helps businesses to reduce the time between cash inflows thus enabling the business to comfortably meet its obligations such as timely paying of the employees. 3. The three components of cash flow.  Trade creditors.  Fixed assets.  Trade debtors. 4. The purpose of cash flow planning.

In its most basic form, cash flow planning aids a company in predicting when it will need to raise capital or borrow money, while also assuring that the company's cash reserves are sufficient to meet current and future financial requirements. 5. When preparing cash flow budget, what will you need to estimate? Preparation of cash flow budget requires the estimation of the future cash income and expenditure of the business. Therefore, when preparing a cash flow budget, one has to approximate sales units, sales income timing and anticipated expenditure. 6. Complete the following cash flow equation: Beginning cash balance + Estimated sales – Estimated payments = Ending balance 7. Which component is generally the largest cash outflow in a retail business? The largest cash outflow component in a retail business is inventory. Unlike variable costs like inventory, it is easier to plan for fixed costs such as rent and utilities. The prediction of inventory that will sell or not is difficult and most retail businesses tend to have a slow rate of stock turnover than the due period for paying bills. 8. What are the two main financial statements prepared in a small business? The two main financial statements in a small business include:  Income statement that analyses the revenues, expenditure and ultimate profit or loss in a business. An income statement contains the sales, cost of goods sold, gross profit, administrative expenses, earning before tax and net income.

 Balance sheet which is a snapshot of the business assets, liabilities and equity at any time. The balance sheet has assets on one side and equity plus liability on the other side, and the two sides must balance out. 9. You have purchased a computer for your business and pay for it in full at the time of purchase with a business cheque, write down the correct entry for the purchase that you made on behalf of the company.  Debiting the computer cost on the expense account  Crediting the computer cost on the asset account. 10. If you knew that your supplier was going to be unable to meet your supply requirements in three months’ time what would you do? The first step in dealing with such an issue will be using a supply chain contingency plan that outlines the steps to take when the supply cannot meet the demand of the business in time. The other option would be looking for another supplier who can supply to the business in time to avoid delays in the activities of the business that can lead to crisis. 11. What can improve the net cash flow of a business in the short term? A business can improve its cash flow in the short term by inventory management, accurate cash flow forecasts, reducing overhead costs and having a backup plan whenever there is a problem in the cash flow. 12. How does the analysis of financial reports help you? When it comes to loan decisions, investments, and other related issues, financial statement analysis is a critical component, as it makes decision-making easier for investors and other third parties who are interested in a corporation's economic and financial situation. Particularly when

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looking to make an investment, because it becomes the most important element of the entire set of decisions that are of interest to the investor or to the person who purchases shares in a company. Its relative importance is determined by the market's current circumstances and when it is trading in the market. A company's financial situation can be accurately assessed by applying financial statement analysis. This allows the company to know what state the company's finances are in so that it can make informed decisions while also observing changes within the organization. 13. Provide an example of Operating Activities in Cash flow statement. Examples of operating activities in a cash flow statement include:  Paying suppliers in cash.  Payment of wages in cash.  Cash sales of goods and services.  Cash payment for product promotion and other daily expenses. 14. A business shows the following result for a period  Revenue $200,000  Cost of goods sold $150,000  Operating expenses $100,000 Calculate the net income. Revenue ($200,000)-Cost of goods sold ($150,000) = Gross profit $50,000-

Gross profit ($50,000) – Operating expenses ($100,000) = Net income $0 (-$50,000) 15. Using the data above, find out the expected cash position at the end of month 2. Month 1 Month 2 Month 3 Opening cash position -$600 -$420 $1043 Total receipts $3020 $4680 $3716 Total payments $2840 $3217 $5960 Net cash flow $180 $1463 -$2244 Closing cash position -$420 $1043 -$1201 Part B 1. You have started a restaurant with your brother and your sister. At the end of the financial year total sales revenue was $160,000 and net profit after tax was $20,000. Your sister has suggested that the profit made during the year should be used to redecorate the premises; but your brother suggested that the money should be used in purchasing a new wood fire oven, so you could start selling take away pizzas. They have approached you in order to help on deciding how the $20,000 should be allocated for the next financial year. Your sister claims that if the $20,000 is used in redecorating the premises you could increase menu prices by 20%.

Your brother argues that if a new wood fire oven is purchased, the restaurant would be able to sell at least 150 pizzas per month for at least $15.00 each pizza (total cost per take away pizza $4.50). a) What project would you choose? Why? How would you convince your shareholders that your choice is the right priority for the allocation of the $20,000? I believe that the sister's idea is the best because the brother suggested that the money be used to purchase a new wood fire oven so that you could start selling take-out pizzas, and that the restaurant would be able to sell at least 150 pizzas per month for at least $15.00 per pizza (total cost per take-out pizza $4.50), which would allow the restaurant to make at least $15,000 per year. Overall, it is evident that total sales revenue will increase by only $27,000 at the end of the fiscal year in question. On the other hand, according to the sister's proposal, if the $20,000 is used to redecorate the premises, you will be able to increase menu prices by 20%. It demonstrates that total sales revenue will increase by $32,000 by the end of the fiscal year in question. In my opinion, we should spend the $20,000 on interior decorating. b) Who else would you consult with before making a decision between redecorating or purchasing equipment? Before making the final investment decision I would consult the finance manager and the shareholders. c) What records would be necessary to keep if the funds are allocated to re- decorating the restaurant?

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The records to be kept include quotation of the price for redecorating and bills for the various expenses incurred. 2. Explain why budgeting is important and why it should be implemented despite the size of the organisation. Having a budget does not guarantee success, but it does assist in avoiding failure in many situations. Budgeting is beneficial for both planning and controlling the financial operations of a company. Without control over spending, planning is pointless, and without planning, there are no business objectives to achieve in the first place. Budgeting involves identifying and forecasting current available capital as well as projecting future expenditure and incoming revenues. Businesses can use the budget to compare performance to expenditure and ensure that resources are available for initiatives that promote growth and development. It allows the businesses owner to focus on cash flow, cost reduction, profit improvement, and return on investment. 3. What are the first and the last days of the Financial Year for a restaurant operating in Australia? In Australia, the fiscal year begins on July 1 and ends on June 30 of the following year. How would these dates affect the preparation of your sales budget? Price declines can be attributed to tax loss selling in the run-up to June 30, although prices begin to rise once more at the end of the fiscal year and into the new fiscal year.

4. You are taking over your family business. All financial information is kept manually by your father (the owner) of the restaurant. The purchase budgets are currently produced manually by your mother and the financial information/budget forecasts are constantly inaccurate. a) What technological recommendations you would make to the owners? I would recommend using computers that would enhance data analysis and data storage and retrieval thus improving the efficiency of business operations. b) What software(s) would you recommend in order to improve the current situation? I would recommend use of Microsoft office suite and google sheets. c) Describe the main advantages of using a software for developing and monitoring budgets in comparison to keeping manual records.  By quantifying financial goal setting using software, it is possible to communicate performance objectives and standards more effectively.  Software assist in improved cash management, ensuring the liquidity required for significant capital expenditures. 5. The following data was extracted from the Sales Budget of ABC Pizza Plaza. Please refer to the table below in order to answers questions a and b. Financial year Budgeted Actual 2007/08 $350,000 $290,000 2008/09 $400,000 $250,000

a) Calculate and classify the variances as Favourable or Unfavourable for both years. 2007/08 variance= ($350,000- $290,000) = $60,000 2008/08 variance= ($400,000-$250,000) =$ 150,000 The variances are unfavourable for both years since the variances are too large leading to mismatch of expectation and actual scenarios. b) Describe 3 different events that could possibly justify these variances and suggest relevant approaches that management could adopt in order to effectively manage the deviations found.  Expectations  Budget vs Actual  Variation Expectations and budgets were set unrealistically high as a result of the budgets expected in both years being too high or unrealistic in comparison to the actual revenue in both years. Managers are encouraged to seek out specialized personnel or external assessors who can advise them on how to develop a relevant and accurate budget for their establishment. Variations in raw material expenses, lower sales, competitors offering better prices or larger and more effective advertisements, among other factors, may contribute to the actual budgets being higher or lower than expected.

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As previously stated, it is critical to determine whether looking for new suppliers who can offer better prices while maintaining the same quality is the best option. Additionally, researching marketing and sales strategies will aid in increasing sales in the restaurant. 6. Adam Smith was responsible for managing his brother’s Coffee Shop for 2 months while his brother went on holidays. Unfortunately, his brother did not budget very well for the weekly beverage supply and Adam was, every week, short of beverages. In order to solve the last minute beverage shortages Adam made weekly purchases in the local supermarket. Adam paid for the goods on his credit card and did not bother keeping the invoices. According to this scenario explain: a) What are the legal implications/record keeping requirements that were not met by Adam? The legal implication is that all of the statements must be accompanied by the original invoices, and in the event that the accounts are audited by the government, the business must be able to provide proof of each and every movement in the statements to the auditor. It will be impossible to include the purchases into the accounting without the original invoices on hand. All transactions must be recorded in English and kept for a minimum of five years. b) What techniques would you suggest to the owner of the coffee shop in order to improve the budgeting accuracy for purchases of beverage stock? I would suggest checking the presence of a good software capable of showing the amount of beverages that they have and the expected expenditure. I also recommend comparing between months and figuring out the amount that is closest to the needs, in case of lack of any good software to do the calculations.

To track the amount of money spent and received on beverages, I would recommend using a cashbook or a financial accounting program that could show the amount of money spent and received on beverages in real time and could look at the data month by month if it were necessary to redevelop the beverage budget.