19 20 Tutorial 04 Hunyani Questions PDF

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Tutorial 4 1. Discuss the link between profitability and cash flow of a business, using the Hunyani case as an example. Is it true that positive cash flow is always linked with profitability (or overall business performance)? We can see from the study that there is positive relationship between the cashflow of a business and the businesses profitability. The paper outlines a couple of reasons for this, for example talking about how proper cashflow management exists when a business is management more effectively. By this meaning that there is accurate forecasts of future cash in flows and out flows. The argues to the point that to a certain extent the cashflow of a business is to an extent an indicator of how well a business is run. However the extent to which this is true is not as clear and the paper outlines a couple of reasons for this. For example if a business borrows a large sum of money it could increase their cashflow and seem sustainable. However borrowing a large sum of capital would increase the cost of their production as they have to make interest payments on that loan. As this shows the cashflow can be misleading, but cashflow is still the ‘lifeblood’ life blood of a business and the even if the presence of good cashflow management does not necessarily mean that there is more profit, very poor cashflow management can cause a business to shut down. 2. Why is the cash operating cycle important for a new business, based on Hunyani as a specific example? The cash operating cycle of a business is important as it is shows how quickly a business turns over its inventory and takes into account the accounts receivable and payable. The importance of this is that it indicates how quickly the business can expect to turn over the operating costs. If this is higher it indicates that businesses are not as high of risk of not being able to pay their bills. An important part of this is that receivable collection period occurs faster than the creditors payment period in an ideal world, or at the same rate, the reason for this is that a business rather have the money to pay bills faster. This is done by a business reducing the time between cash receipts and payment. Hunyani should aim to do this and at the minimum make sure that there is a ‘best fit’ compromise between the payments they receive and make. If they fail to do this it could result in them not being able to pay their bills on time and this could hurt both parties as the other business is likely relying on payment to pay other expenses. Due to this it could harm the relationship between the two firms and therefore make it harder for Hunyani to achieve favourable credit periods in the future. The case mentioned that by shortening their cash operating cycle Hunyani ensures that the business has a healthy cash pattern where risk of insolvency is low which allows the future of the company to be more certain which helps profits.

3. This research took place 2000-2010 in Zimbabwe. Numerous references in the case (e.g., posting checks, lockboxes, etc.) depict the old way of managing cash systems. What improvements are there to cash management through increased automation and digitalisation of accounts? Are there any disadvantages?

There are two parts to this, the first is the way that payments are made and the second is the ability to view and act on all of your incoming and outgoing cashflows. When it comes to the evolution of payment systems generally the accepting of cash or cash alternatives has become much easier. There are two parts to this, the first is the increased presence of debit/credit cards and the second is the increased presence of internet transactions. There is a negative side to the increased presence of debit/credit cards. Most debit and credit card companies require the business to pay a fee for accepting their cards, this can decrease the amount og money received. However this is normally a very small fee and the increased ease and time save of making cash runs more than makes up for this. Furthermore with online banking which has really made a rise in the last ten years individuals can now make payments from their office that they know will directly enter the other individual account. Again saving time, further there are many systems now that will keep a track of all cash inflows and out flows which makes it easier to forecast. Through the increased ability for a business to visualise and analyse their data they can always know the areas that are causing high costs and how to take action. These systems do still need to be maintained with up to date information and if this is not done they could lead to very misleading interpretation. 4. Do you have any other recommendations for Hunyani apart from what the authors have provided? Try to suggest two improvements and explain how these would help reduce cash management problems. 1. It states in the paper that there have been attempts by hunyani and one major issues that they face is that their supplies often demand earlier payment which is followed up with fines of some sort. Due to this it could be possible that they look for different suppliers by doing this they could also enter into negotiations with their current suppliers about payment terms. By doing this hopefully they could remove fines as an expense and therefore be more profitable. 2.The paper fines that cash projections are of the utmost importance to their business, this could mean that there is not good communications between the sales team and the finance team about expected new sales. Improving this communication and providing the sales people a method to pass financial forecasts on to the finance team could allow them to forecast more effectively....