CASH ANALYSIS

1. Why is it so important that commercial businesses manage their cash

efficiently?
 Cash is the “lifeblood” of any commercial business, so the management
of cash position is vital for its survival.
 By managing cash flow efficiently, businesses can create enough cash in
order to meet businesses’ needs and avoid taking into debt.
2. How does an increase in the holding of inventory in an accounting period
impact on the cash holding of the business?
 Holding inventory is unavoidable and there is a see-saw effect between
inventory and cash. If a business holds too much inventory stock, it
cannot be converted to cash so as to invest in other activities of the
business.
 In converse side, the lack of inventory also affected badly to sales
number. It leads to the reduction of revenue, customer lost.
3. What are the key sensitivities that can we applied to cash flow forecasts and
why are these used?
 Key sensitivities: sales, cost of sales, trade receivables/payables, interest
rate/exchange rate, timescales
 There are 2 points to note:
- If lending is made based on the projections, the bank will need to
check whether the figures provided are realistic. It is necessary that
the bank cannot simply take initial cash flows without question or
due diligence.
- It is a danger to apply too many sensitivities to the figures.
4. Under what circumtances is it useful to use the EBITDA calculation?
 EBITDA is usually used as a way of determining the ongoing
performance of a business, over a two-or-three-year period.
5. How is the CFADS calculation used to calculate the ability of a business to
repay its borrowing?
  The starting point for CFADS is to use EBITDA, on the basis that we
need to readjust the profit figures for the year to reflect items that are
non-cash. Using that, we can build up a picture of the cash performance
for this business.
6. What are the potential reasons for a business overtrading and what might a
business do to tackle the problem?
 Growth at any cost
 Growth due to a new product or service
 Solutions:
- Control of the working capital position
- Salaries/drawings/dividends: the owners of the business need to
support themselves
- Funding options