CONTROL OF LIABILITIES

• Current liabilities are short term financial

commitments paid by the business. It allows
assets to be converted into cash to pay
creditors.

• Payables may be held back until final due date to

improve a firm's liquidity position. Firm may take
advantage of interest free period, extended
terms
or discounts. A business must pay by due date to
avoid late charges.
• Floor plan/stock finance – supplier agrees to
provide a goods for a period of time.
• Consignment – supply of goods with payment
required only when goods are sold or returned.
• Loans – short term loans needed to cover
sale/purchase of property, import/export
commitments

Questions 1-4 page 183

1.Control of liabilities is important when managing

working capital as it enables a business to convert
current assets into cash so that it is able to pay
creditors and avoid unnecessary charges or costs.

2.Taking advantage of credit may assist working

 capital in that it allows a business to improve its
liquidity position and enables it to minimise
costs.

3.The use of consignment and floor plan would

enable a business to have a sufficient supply of
necessary stock (motorcycles) without the
burden of payment. It means that a business can
put its working capital to other necessary uses
such as utility bills or wages.
4.A bank loan is an important source of funds but
can be costly. Soulos Motors would need to
consider establishment costs, the current rate of
interest and possible fees and charges that may
be incurred. An overdraft, however, is a cheaper
source particularly if Soulos Bros has a positive
relationship with a bank.

CASH FlOW MANAGEMENT

• is the movement of cash in and out of a business
over time.
• A CASH FLOW STATEMENT provides important
information about a business' ability to pay
debts and indicates the movement of cash
receipts and payments over a period of time.
• It can be examined by creditors, lenders of
finance, owners and shareholders to assess a
business' cash flow patterns.

• A CASH FLOW STATEMENT CAN show if a

business :-
 • generate favourable cash flow
• pay its debts
• have sufficient funds for future
expansion
• obtain external finance
• pay drawings to owners/dividends to
shareholders

• CASH FLOW STATEMENTS can be divided into...

OPERATING ACTIVITIES – cash inflow and outflow

relating to main activity of business i.e product or
service.
Inflow outflow

Revenue from sales Payment to suppliers

Dividends and interest received Payment to employees
Operating expenses – rent,
insurance, utilities,etc

INVESTING ACTIVITIES- inflow/outflow related to

purchase and sale of non-current assets and
investments.
Inflow outflow

Selling of car Purchase of new equipment,

plant or property

FINANCING ACTIVITIES – inflow /outflow relating to

borrowing activities of a business.

Inflow outflow
Issuing shares (equity) Repayment of debt

capital contributed by owner cash drawings of owner

(equity)
payment of dividends to
loans from financial institutions investors
(debt)

Questions 1-8 pages 188-189

1.A statement of cash flow provides a link between

the revenue statement and balance sheet which
shows a business' ability to pay its debts on
time.
2.
Operating Investing financing
Paid wages to employees Purchased a 90 day treasury bill Took out short term loan
Paid tax Purchased equipment Mortgage repayment
Received cash from customers Sold furniture and fittings Paid a dividend
Paid interest

3.

Johnson Ltd
Statement of Cash flows for the year
ended
th
30 June 2008
Cash flows from operating activities
Received cash from customers 25 000
Paid tax (4 500)
Paid wages to employees (4 000)

Net cash provided by operating activities 16 500

Cash flows from investing activities

Sold furniture and fittings 1 700
Purchased equipment (12 000)
Purchased a 90 day Treasury bill (3 000)

Net cash from investing activities (13 300)

Cash flow from financing activities

Paid interest (2 000)
Took out short term loan 10 000
Paid a dividend (3 200)
mortgage repayments (5 000)

Net cash from financing activities ( 200)

Net increase/(decrease) in cash 3 000

Cash at beginning of year 7 500

Cash at the end of the year 10 500

4. The following changes could be made:

• withhold dividend and use to reinvest
• take out a smaller short term loan or overdraft
when necessary
• purchase 2 hand equipment or lease it
nd
5.
TRANSACTION OPERATE/INVEST/ CASH
FINANCE INFLOW/OUTFLOW

a) repay loan F OUT

b) purchase I OUT
bonds
c) paid suppliers O OUT
d) paid tax O OUT
e) purchase I OUT
machinery and
morgage
f) received $70K O IN
from
acc.receivable
g) received $20k I IN
from investments

7. Suggestions for Partridge business to assist in

managing cash flow would be:
• spread insurance policy payment due dates
• add extra tours in summer months
• borrow from overdraft to fund maintenance in
July
8.
Reasons for:
• receive cash immediately instead of waiting for
14 or 30 days to be paid. This gives you the
cash to cover your own costs.
• Reduces need to dip into overdraft to pay bills
Reasons against:
• In accepting less from your clients you train
them to expect to always ask for a discount.
• it means you earn less profit. In addition, you
may be falling short of forecasted profits without
realising why.

PROFITABILITY MANAGEMENT
• Opening store, introduce new
product or buy equipment – are
influence by costs.
• Costs must be: identified,
analysed, controlled.
• Management must have a clear

understanding of what the costs

are: generally fixed and variable.
• Fixed costs are paid regardless of
what happens. E.g Salaries,
depreciation, insurance and
lease.
• Variable costs change
proportionately with level of
operating activity in the business.
E.g materials and labour.
• Changes in volume need to be
 managed.
• Management needs to be able to
identify their source and
amounts.
• Costs can be directly attributed to
particular sections, these are
termed cost centres. E.g in
manufacturing would be called a
production cost centre.
• Cost centres have direct and
indirect costs.
Questions page 192

1. It is important to manage costs and revenues in a

business because it both the business' profit.
2. The difference between fixed and variable costs is that
fixed costs are not dependant the level of operating
activity of the business. An example of a fixed cost is
the monthly rent on a factory. On the other hand
variable costs are dependant on the operating activity
of the business. An example is the raw materials
needed to produce Bronks Chocolates.
3.
Cost fixed/variable Reason
Factory rent Fixed Cannot be
changed in short
term
Advertising Variable Can be changed
Wages Variable As production
Direct labour increases/decrease
s so will wages
Admin expenses fixed Does not vary with
(eg secretary, production
accountants)

insurance fixed Does not vary with

production
Sales discounts variable Varies at discretion
Lease payments Fixed Binding contract
packaging Variable Varies based on
production
Delivery costs Variable Varies based on
production
Office wages variable Varies based on
production

4.
Reasons for falling profits:-
◦ increase in cost of goods sold
◦ increase in admin costs e.g rent, utilities, wages
Marco and Betty could negotiate lower prices with current
supplier or change suppliers. They could also increase
prices.

5. Cost centres are department or section of a business to

which direct costs may be allocated. They use them to
analyse and control costs.

6. Georgia could better manage costs by:-

• negotiate better terms for rent and phone
plan
• reduce advertising costs
• reduce hours of admin workers