FINANCE NOTES.

The Finance manager will need to consider;

Cash Flow Management

No company can survive without cash. In order to function cash must be available to settle bills as they become due. The finance manager is responsible for balancing the cash inflows from trading with the costs of the organisational requirements and negotiating with the bank manager for borrowings when there is a shortfall.

Cash Flow Forecasts

Before a bank manager will lend you money, you will need to demonstrate that the company is well managed, has a clear idea of where it is going and understands the cash implications of the chosen strategy. In short the bank will require confidence that you are in control of your cash. The cash flow forecast will be used to demonstrate this, and is also very useful as a central decision making tool to evaluate alternative strategies.

Cash flow forecasts may be either "Paper based an A3 version of the sheet at the back of the participants guide, or can be spreadsheet based. They should normally be maintained for at least 6 periods into the future.

You will be able to raise extra cash in a number of ways;

Negotiated loans -

Discussed in the period before the money is needed

By negotiation with the banker you will be able to raise funding by normal loans. However the bank is unlikely to lend money, or will charge a painful rate of interest if you are unable to provide a long term cash flow forecast. Interest rates for well managed companies tend to be around 4% per quarter. It should be possible to use this form of borrowing nearly all the time. There are very few receipts or costs for which you do not have a couple of periods warning. If the communications process between, finance, marketing, production and personnel is working properly there should be no need for any other form of loan.

Normal loans are repaid in the subsequent eight periods of play.

Emergency loans -

Discussed in the Period you need the money

If your cash forecasting doesn't predict a short fall in the current period, and you discover a shortage you will be able to borrow at emergency rates of interest - which are fixed at 12.5% for one period. You will have to pay them back in the next period. Alternatively you could use factoring - described below.

Deficit Loans-

Imposed in the period in which the money is required

If you run short of money and don't discover it until after the period is input into the computer, the bank will automatically grant you a deficit loan to cover the short fall and the interest to cover it - the interest is charged at 25%. The loan is for one period only.

Factoring

It is quite common business practice with small Companies for a factoring house to "buy" or "factor" some of the debtors. Naturally there is a charge for this which will depend on the amount of debtors factored - but for relatively small sums it is cheaper then an emergency loan, and it does not have to be paid back. However the money that can be expected in the subsequent period from debtors will be that much less. Factored money arrives in the period in which it is requested.

Debentures

This is a special very long term kind of debt, which will never be repaid in the life of the simulation. You would only be able to borrow on this basis when you have a successful track record of cash management of about 6 quarters. The rate of interest is normally about 2% per quarter, but is negotiable.

Share Issues

Once your company is successfully established and your share price in the stock market reflects this, you will be able to create and sell some more shares in the market to raise extra cash. Your overall share price will fall initially when you do this as more shareholders will be sharing the future profits between them.

Dividends

Your share price in the market place will be affected by two things; firstly the profit record of your company and secondly the proportion of that annual profit you chose to give as dividend to reward the shareholders for their investment. Give them too little and the share price might be artificially low, and they will not support your share price.

Give them too much and there will be no money left in the company to help it grow.

Taxation

Once a year you will be required to pay tax based on the previous years profit, you will need an accurate cash flow forecast to ensure that there are sufficient funds to do so. As the tax bill is based on the previous years trading it tends to be paid in the first quarter of the new year. You will also need to estimate the profit in the last period of the previous year, and the associated tax bill. This way you will have all the information you need to calculate the total tax liability for the previous year.

Documentation

Each period, together with your results and your input sheet you will receive a copy of your profit and loss statement, your balance sheet and a cash rationalisation document for the period finished. Make sure you understand them and talk to an umpire if you don't.