This document contains a detailed explanation of the 6 Components covered in Financial Management 332. Each component contains exercises explained step by step and solutions to self studies. Some components contain the EPs.
FINANCIAL MANAGEMENT 332
Component 1: Budgets as Financial Management tool
Nature of Budgets
• Definition
- Systematic statement of expected future income and expenditure for a particular period with
the aim of controlling expenditure and serve as a method of evaluating financial performance.
• Requirements in terms of information
- Objective, consistent, reliable, realistic
- Key words:
o Planning, future, quantitative money terms, comparative measures, control
• Purpose
- Higher profitability
o Limit waste (capacity of PPE…?)
o Improve management decisions
- Ensure optimal liquidity
o Identify best means of financing
o Advanced knowledge of future cash requirements
• Function of budgets
- Task assignment, authorisation to act
- Means of communication
- Forecasting function
- Means of co-ordination
- Means of control
- Educate managers
Attitude towards budgets
• Most important obstacles
- Conflict as a result of conflicting interests
- Excessive expectations of subordinates
- Excessive emphasis of control function
- No room for own discretion
Management planning and control
• Planning
- Development of future-orientated objectives
- Drawing up plans quantified in monetary terms to achieve objectives
- Integrated budgeting system
- Early warning signal
- Three types of projections
o Reference projection → look at past and compare
o Desired projection
o Planned projection → how the budget will feed into plans
• Control
- Observation of differences between financial norms & actual figures
- Combined with critical evaluation & reporting
- Budgetary control
o Ex post transaction control
o Purpose
▪ Analyse deviations, corrective measures
, ▪ Reward and reprimand
▪ Planning data
▪ Errors kept to a minimum
- Steps of control
o Setting of standards
o Collection of information; comparing actual performance with standard
o Analysis and evaluation of performance
o Corrective action
Integrated budget system
• System that draws all the different sub-budgets into one system resulting in the main budget
, • Income statement and balance sheet work together so need to keep both in mind
Cash Budget
• Definition
- Tool, in the form of a statement, which contains an estimate of all the outgoing and incoming
amounts during a particular future period.
• Preview of
- Expected cash receipts and payments
- Future cash requirements
- Periods where financing is required for cash shortages; investment of surplus cash
• Measures to effectively manage cash requirements:
- Delay payments; speeding up recoveries
- Synchronising inflow and outflow of cash
- Inventory model applied for cash management
• Differences between profit and cash
- Income statement show profit/loss (gain/loss disposal of PPE, etc.)
o Convert to corresponding cash values
- Contains non-cash items (depreciation, amortisation, etc.)
o Excluded, but impact on tax calculation is NB
- Cash budget must show all cash tax payments
o Income tax, tax on gain/loss disposal PPE, etc.
• Other transactions:
- Capital investment:
o Cash purchases of assets; repayment of instalments
- Capital structure:
o Shares issued/repurchased; dividends paid
o Loans obtained/redeemed; finance cost
• Cash receipts
- Sales revenue:
o Cash sales: Cash received immediately
o Cash discount: Discount sometimes offered on cash sales
o Credit sales: Repayment by debtors over time
o Bad debt: Credit sales not collected
- Other cash receipts:
o Disposal of assets (PPE, Investments)
o Investment income (interest / dividends received)
• Cash payments
- Purchases:
o Cash purchases: Cash paid immediately
o Credit purchases: Repayment to creditors over time
o Cash discount: Discount sometimes received on cash purchases
- Calculation of purchases:
o Opening inventory + Purchases – Cost of Sales = Closing inventory
- Operating expenses
o Salaries, wages, electricity, rent, etc.
- Tax
- Other cash payments:
o Purchases of assets (PPE, Investments)
o Finance cost (interest / dividends paid)
, Cash budgeting: Problem 1 → check downloads
Advice
- Invest surplus
- Take a loan
- Pay debts off over a longer period
- Bank overdraft
Cash management:
• Negative cash balance
- Short-term solutions:
o Bank overdraft, short-term debt
o Sell marketable securities
- Long-term solutions:
o May require adjustment to capital structure
o Additional LT KV , equity
• Positive cash balance
- Short-term utilisation:
o Redeem short-term debt
o Purchase marketable securities
- Long-term utilisation:
o Investment in non-current assets
Cash Management example
• Assume the following cash budget is provided to you:
- The company requires a closing cash balance of R10 000 at the end of each year.
- Assume that all cash deficits will be financed by means of short-term loans.
- Any cash surpluses will first be used to redeem the previous years’ financing.
- Any additional cash surpluses that may remain can then be utilised to purchase marketable
securities.
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