Assessment 2

Part A – Written Responses

1. Explain Cash Flow Management.

The definition of cash flow management for business can be summarized as the process of
monitoring, analysing, and optimizing the net amount of cash receipts minus cash expenses. Net
cash flow is an important measure of financial health for any business. Cash flow is the net change in
your company's cash position from one period to the next. If you take in more cash than you send
out, you have a positive cash flow. You have a negative cash flow if you have more cash outflow than
inflow. Cash flow is a key indicator of financial health.

2. What are the two important benefits of cash flow management?

 Cash is king
The importance of strong cash flow is aptly stated in the common expression "cash is king." The
premise of this is that having cash puts you in a more stable position with better buying power.
While you can borrow money at times, cash affords you greater protection against loan defaults
or foreclosures. Cash flow is distinct from cash position. Having cash on hand is critical, but cash
flow indicates an ongoing ability to generate and use cash.

 You Won’t Run Out of Cash

No doubt this is the biggest advantage of good cash flow management. Managing your cash flow
well, will let you predict how much money you’ll be bringing into your business and ensure that
it's always more than you'll need to spend.

3. List the three components of cash flow

 Operating Activities
The first section of the cash flow statement illustrates the cash received and used during
normal operating activities. This section details the changes in the ledger account balances
for your current assets and current liabilities. These accounts are your accounts payable,
accounts receivable, prepaid insurance and unearned revenues. When you sell products or
services, that activity is reported here.
 Investment Activities
The second section is dedicated to investment activity. All of a company's investments are
listed under this category. Any purchase or sale of property, equipment and plants also
qualify under the investment section. The ledger accounts to review for this section include
the long-term investments account, vehicles, capital equipment accounts, land and buildings.
If you run a cafe or restaurant, buying a new grill or oven would qualify under this section.
Report any equipment you buy for your regular business operations here.
 Financing Activities
The third section of the cash flow statement lists the information for the company's financing
activities. Financing activities include purchases of bonds and stock as well as dividend
payments. Some of the applicable ledger accounts include your capital equipment and paid-
in capital accounts, notes and bonds payable, stock and retained earnings. For a small
business, one of the most common financing activities for this section is from the Small
Business Administration. If you secured an SBA loan to help you establish or grow your
business, that loan should be reported here.
4. What is the purpose of cash flow planning?

Cash flow planning is an essential process in any company - not only can it give peace of mind, but
also ensure your business finance remains as stable as possible. The principal purpose of cash flow
planning is help to the company to predict when they will need to raise capital or borrow, giving
security to the company that the cash balance is enough to meet/satisfy the actual and future
requirements financials.

5. When preparing cash flow budget, what will you need to estimate?

Properly preparing your cash budget will show how cash flows in and out of your business. Also, it
may then be used in planning your short-term credit needs. In today's financial world, you are
required by most financial institutions to prepare cash budgets before making capital expenditures
for new assets as well as for expenditures associated with any planned expansion. The cash budget
determines your future ability to pay debts as well as expenses. For example, preliminary budget
estimates may reveal that your disbursements are lumped together and that, with more careful
planning, you can spread your payments to creditors more evenly throughout the entire year. As a
result, less bank credit will be needed and interest costs will be lower. Banks and other credit-
granting institutions are more inclined to grant you loans under favourable terms if your loan request
is supported by a methodical cash plan. Similarly, businesses that operate on a casual day-to-day
basis are more likely to borrow funds at inopportune times and in excessive amounts. Without
planning, there is no certainty that you will be able to repay your loans on schedule. However, once
you've carefully mapped out a cash budget, you will be able to compare it to the actual cash inflows
and outflows of your business. You will find that this comparison will go a long way in assisting you
during future cash budget preparation. Also, a monthly cash budget helps pinpoint estimated cash
balances at the end of each month which may foresee short-term cash shortfalls.

6. Complete the following cash flow equation:

? + Estimated Sales – ? = Ending Cash Balance

Beginning cash balance + Estimated Sales – Estimated payments = Ending Cash Balance

7. Which component is generally the largest cash outflow in a retail business?

- Cost of goods sold. In a retail, business the largest cash outflow is generally the cost of goods
to be sold. Retail businesses purchase stock for resale. The cost of this stock is referred to as
cost of goods sold and it is generally the largest cash outflow for this type of business.

8. What are the two main financial statements prepared in a small business?

- Balance sheet
- Profit Statement
- Loss Statement
The income statement presents a summary of the revenues, gains, expenses, losses, and net income
or net loss of an entity for a specific period. This statement is similar to a moving picture of the
entity's operations during this period of time. The cash flow statement summarizes an entity's cash
receipts and cash payments relating to its operating, investing, and financing activities during a
particular period.

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.

Debit computer, Credit Accounts payable.

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?

It is really important to understand why your supplier is going to be unable to meet your supply
requirements. Talk with the supplier. For example, the problem maybe with their supplier or maybe
there has been a communications or mathematical problem with your order. Once you know the
reason for the problem you can then decide whether to place a larger order now, or look for other
suppliers. Talk with your manager and other managers who are relying on these supplies. Maybe if
the problem is temporary your organisation may decide to carry out some routine maintenance
activities during that problem period.

11. What can improve the net cash flow of a business in the short term?

Cut costs
By far the most important method of improving cash flow. Every business can identify savings in non-
essential costs if it looks hard enough. The recent credit crunch and recession has proven that
businesses can take drastic actions to cut overheads and other costs, which immediately reduces
cash outflows.

Cut stocks
Reduce the amount of cash tied up by buying and holding raw materials or goods for resale. This can
be done by (a) ordering less stock from suppliers and/or (b) offering discounts on stocks held to
encourage customers to buy (ideally for cash).

Delay payments to suppliers

A dangerous game, but widely used in business. By taking longer to pay bills owed, a business can
reduce cash outflows (at the risk of damaging relationships with suppliers though).

12. How does the analysis of financial reports help you?

Financial statement analysis involves gaining an understanding of an organization's financial

situation by reviewing its financial statements. This review involves identifying the following
items for a company's financial statements over a series of reporting periods:

 Trends: Create trend lines for key items in the financial statements over multiple time
periods, to see how the company is performing. Typical trend lines are for revenues,
the gross margin, net profits, cash, accounts receivable, and debt.
 Proportion analysis: An array of ratios is available for discerning the relationship
between the size of various accounts in the financial statements. For example, one can
 calculate a company's quick ratio to estimate its ability to pay its immediate liabilities,
or its debt to equity ratio to see if it has taken on too much debt. These analyses are
frequently between the revenues and expenses listed on the income statement and the
assets, liabilities, and equity accounts listed on the balance sheet .

13. Provide an example of Operating Activities in Cash flow statement

Cash flows from operating activities is a section of the cash flow statement that explains the sources
and uses of cash from ongoing regular business activities in a given period. The cash flows
from operating activities section typically includes net income from the income statement,
adjustments to net income and changes in working capital.

Net income is typically the first line item in the operating activities section of the cash flow
statement. This value, which measures a business's profitability, is derived directly from the net
income shown in the company's income statement for the corresponding period. The cash flow
statement must then reconcile net income to net cash flows by adding back non-cash expenses such
as depreciation and amortization. Similar adjustments are made for non-cash expenses or income
such as share-based compensation or unrealized gains from foreign currency translation.

14. A business shows the following result for a period

a. Revenue $200,000
b. Cost of goods sold $150,000
c. Operating expenses $100,000

Calculate the Net income of the business.

Revenue $200,000

Cost of goods sold $150,000

Operating expenses $100,000

Net income ($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 $1,043

Total receipts $3,020 $4,680 $3,716

Total payments $2,840 $3,217 $5,960

Net cash flow

($420) $1,043 ($1,201)
Closing cash position ($420) $1,043 ($1,201)
Part B – Written or Oral Questions

Answer the following questions in the spaces provided.

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 woodfire 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? (12 marks)

I would choose the option of the new wood fire oven. On the on hand, the idea of increasing
menu prices by 20% could increase revenues as a result of the price, however, it is more likely to
affect the demand of the pizzas, as the prices rise less customers where be able to pay for those
prices.

On the other hand, by installing a new wood fire oven the production will grow allowing the
company offers take way pizzas. Although the costs of take way pizzas are higher, the growth of
sales will cover the effect of the extra cost. Furthermore, I consider too risky to elevate the prices
of pizzas without knowing how badly it will impact the number of sales.

To convince the shareholder of decision like this is important to have a strong analysis of both
options and their consequences. The best way to analyse both situations is to project the sales
during the next periods, then use future free cash flow projections.

b. Who else would you consult with before making a decision between redecorating or
purchasing equipment? (3 marks)

Business has to consult with the financial department and marketing department. The marketing
department could estimate the impact of prices on sales as well as the likelihood of attracting
more consumers through the implementation of take way pizzas. Furthermore, after the
estimation of the marketing staff the financial department could use those numbers to find out
the return on inversion of each option.

c. What records would be necessary to keep if the funds are allocated to re- decorating the
restaurant? (3 marks)

Both proposals for the improvement of the company are good, as both would help the increase
in the sales revenue of the restaurant. However, if the total cost of pizza production with the new
wood fire oven is 10.5 dollars (pizza price minus take away cost) we will have a total of $18,900
 of income at the end of the financial year. This is only a 9.8% increase in sales revenue, while the
increase in revenues is 20% if the establishment is restored. For such reason, it is better to take
the decision to restore the restaurant. Besides, there are many possibilities to improve our
premises with this budget, only requires observation, creativity and common sense to improve
the way our customers perceive or feel when visiting our business. Making this restaurant a
comfortable environment for our customers is the best way to hook them so that they continue
to dispense with our services and also, they themselves would be a good publicity to attract
more customers when they talk about our restaurant to other people.

However, this is not a decision that must be taken expeditiously, it is necessary to make several
accounts before establishing what is going to be done for the improvement of the restaurant and
its sales. A good option is to get acquainted with people who have more experience in the
subject. Owners of other restaurants for example, not necessarily that they have our same
services to enter into a conflict of interests, but someone who knows the handling of hospitality.

On the other hand, it is important to keep accounting records in order to file and pay taxes, and
understand the financial workings of our business. Certain information needs to be kept such as,
name of the company, ABN, invoices, dates of working on the restauration, gross and net
amounts paid, any deductions from the gross amount, etc.

d. Explain why budgeting is important and why it should be implemented despite the size of the
organisation. (5 marks)

When we make a budget helps us know if the company is going to have benefits in the future, it
identifies that part of the business can improve and shows the money that is expected to enter
and exit the business. Management must organize its financial resources if it wants to develop its
activities and have the support elements that allow it to measure the degree of effort that each
unit has for the achievement of the goals set by the top management.The main purposes of
budgeting within any organization are:
 The budget helps to have a broader view of the income, expenses and benefits in the
project
 It is a guide for the decision making obtaining a Financial Control of the organization.
 It is a tool to monitor business performance by adapting both preventive and corrective
roles within the organization.
Regardless of the size of the company, it is very beneficial to make budgets. We can analyze this
in the following way. It is very likely that when we go to the supermarket to make our purchases,
we carry a list of items and a certain amount of money to purchase these products. If the money
is long enough, then we have managed the budget correctly. In this way, we can realize that no
matter how small our business is, because a budget helps us to know if the company is going to
have benefits in the future, it identifies that part of the business can improve and shows the
money that is expected to get in and out of the business.

e. What are the first and the last days of the Financial Year for a restaurant operating in Australia?
(2 marks)

The Australian Financial Year runs from 1st of July to 30th of June. This financial year can affect
mostly large public companies, which may have an annual event that generates large revenues
or large expenses. Ideally, these important events should occur at least a month and a half or
 two months before the close of the financial year, so they have enough time to make all
outstanding payments or collect all payments from their customers.

On the other hand, there are other companies that only exist in short terms or seasons, such as
a Halloween costume shop that only exists between August and November of each year and
requires only a short fiscal year.Small businesses can also be affected by this financial year,
because not being in parallel with the calendar year, this may require accounting experience or
bandwidth to keep track of the adjusted deadlines.

a. How would these dates affect the preparation of your sales budget? (2 marks)

In other countries, the financial year goes from January to December that means fourth quarter
will be the one better result as a result of sales in November and December. In Australia, this will
have place in the second quarter; therefore, quarterly sales will be different to other places in
the world.

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? (2 marks)

There are tools easy to use when we do not have a very large system of purchase budgets and
financial information. Excel, Access and other applications are powerful tools when used
correctly and with the right controls. Workflow tools, thresholds, and data management can
improve consistency and highlight areas of focus for additional attention. However, it is
necessary to spend a little time improving the templates.

b. What software(s) would you recommend in order to improve the current situation? (1
mark)

Since it is a small family business, it is very possible that they do not want to invest in expensive
softwares, besides I do not think it is necessary since they have been doing the inventories and
taking all the financial information manually. Therefore, I would recommend Factuso and
Nominasol, they are cheap, easily accessible and easy to use softwares. FactuSo, is a reporting
program. It covers the entire commercial line of any company: orders to suppliers, goods
receipts, supplier invoices, customer budgets, customer orders, delivery notes, invoices,
receipts, remittances, etc. It allows comprehensive warehouse control, consolidate partial
inventories, and a large number of reports and statistics. Meanwhile, Nominasol, is payroll and
insurance software. Among its functions is the automatic payroll calculation. It has calculator,
task manager, calendar, daily agenda, address book, programmable alarm.

c. Describe the main advantages of using a software for developing and monitoring budgets
in comparison to keeping manual records. (4 marks)

The use of computerized accounting systems has important advantages such as the speed and
precision of the operation and more importantly, we can see the real-time status of the financial
situation of the company. A great advantage is that the data must be entered only once and is
already registered in a series of different accounting records at the same time. But when done
manually you must register the same data as many times as necessary. Another important point
is that these software’s minimizes human error. Nevertheless, the main advantages of a
computerized accounting system are listed below:

 Speed: As was previously said, data entry onto the computer with its formatted screens
and built-in databases of customers and supplier details and stock records can be carried
out far more quickly than any manual processing.
 Automatic document production: fast and accurate invoices, credit notes, purchase
orders, printing statements and payroll documents are all done automatically.
 Accuracy: there is less room for errors as only one accounting entry is needed for each
transaction rather than two (or three) for a manual system.
 Up-to-date information: the accounting records are automatically updated and so account
balances (e.g. customer accounts) will always be up-to-date.
 Availability of information: the data is instantly available and can be made available to
different users in different locations at the same time.
 Management information: reports can be produced which will help management monitor
and control the business, for example the aged debtors’ analysis will show which
customer accounts are overdue, trial balance, trading and profit and loss account and
balance sheet.
 GST/VAT return: the automatic creation of figures for the regular GST/VAT returns.
 Legibility: the onscreen and printed data should always be legible and so will avoid errors
caused by poor figures.
 Efficiency: better use is made of resources and time; cash flow should improve through
better debt collection and inventory control.
 Cost savings: computerized accounting programs reduce staff time doing accounts and
reduce audit expenses as records are neat, up-to-date and accurate.
 Reduce frustration: management can be on top of their accounts and thus reduce stress
levels associated with what is not known.
 The ability to deal in multiple currencies easily: many computerized accounting packages
now allow a business to trade in multiple currencies with ease. Problems associated with
exchange rate changes are minimized.

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. (4
marks)

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. (3 marks + 6 marks)

A favourable variance means that the performance exceeded expectations which could be
because actual revenue exceeded budgeted revenue or actual cost was less than budgeted cost.
on the contrary, an unfavourable variance means that performance fell short of expectations
because actual revenue was less than budgeted revenue or because actual cost exceeded
budgeted cost. A simple formula that we can use in this case is:

𝑣𝑎𝑟𝑖𝑎𝑛𝑐� = 𝑎𝑐𝑡𝑢𝑎� – 𝑏𝑢𝑑𝑔�𝑡�𝑑

Thus, we can see that the variances for the two years are:

Financial year variance

2007/08 -60.000

2008/09 -150.000

These unfavourable variances may be due to actual revenue was less than budgeted revenue and
the 3 different scenarios that could possibly justify these variances are:We can initially say that
sales at the company were low. For which we have an actual revenue less than expected. For this
we can have several solutions, such as lower costs of products, invest in more advertising,
analyse the quality of products and the quality of care to customers, etc.

Another possibility is that expectations were too high. As we can see that the budgeted revenue
is higher in the first year than in the second year, obtaining actual revenue not so different
between the two years. For this, it is advised to analyse the sales history and make a much more
realistic budget. Finally, if this total variation includes expenses incurred for raw materials, it is
possible that suppliers have increased the prices of the products, generating ABC Pizza Plaza an
unfavourable variance. For this it is necessary to analyse if this raw material is of a good quality
with which it justifies its increase of prices otherwise the company should look for other
suppliers.

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? (4 marks)

Initially what Adam should have known is that, it is a good idea to keep the personal and
business records separate, to simplify business reporting. For example, using a dedicated
business credit and debit card for business expenses will facilitate separation of business and
personal expenses.Adam should be aware of the following basic legal requirements for each
business with respect to purchases made, with this, he can demonstrate the money spent even
with his own credit card.
  A cash book or a financial accounting program: with this Adam could record cash receipts
and cash payments made.
 Bank accounts: check books, deposit books and bank statements
 Sales records: invoice books, receipt books, cash register tapes, or credit card
documentation to demonstrate the need to buy more beverages.
 Proof of purchases: cheque butts (larger purchases), petty cash system (smaller cash
purchases), receipts, credit card statements, invoices, any other documents relating to
purchases including copies of agreements or leases.

b. What techniques would you suggest to the owner of the coffee shopin order to
improve the budgeting accuracy for purchases of beverage stock? (5 marks)

The techniques that the owner of the coffee shop needs to apply in his company in order to
improve the budgeting accuracy for purchases of beverage stock are simple. Initially have a good
history of beverage with which he can analyse the amount of drinks that must be purchased
from time to time and also, have a database of beverage that enter and leave the cellar with
which he can be aware when the amount of drinks is decreasing. To achieve this, it is advisable
to use a non-manual system, which facilitates the entry of these data.