Q.1:
Explain to John why it is important to look beyond the “bottom line”.
Bottom line in business is the amount of profit that is deduced after the deduction of all expenses and taxes, this phenomenon helps the investor to determine promptly the current status of the business. JJ and Son are realizing a healthy bottom line for the past four years, yet for John it is important to understand that it is high time to start looking beyond the bottom line. In today’s business world, when the companies have to face so much economic pressures with tighter controls and government policies, and then the never welcomed recession shocks, the company shall aim for long term sustainability of the business, and should focus on non-financial indicators. Working in isolation is no more possible; to capture new markets, new talent, more customers, latest products, company will have to opt for inclusive growth. JJ and Son shall adopt a holistic approach by shifting its focus from a satisfactory bottom line. This can be done by incorporating new dimensions like ‘Conscious Capitalism’, ‘leveraging on Technology’ etc. It is a challenging time for the economy, and effectively maintaining the cost of doing business is a paramount.
Addressing the non – financial indicators, these have been neglected in the past as they tend to be harder to evaluate, also the capital markets are designed to reward financial outcomes consistently. It is very rare that the non – financial results are been rewarded. Focusing only on financial indicators is no longer enough. Inclining global competition, consumer relation, product innovation and employee retention are few of the acclaimed drivers of the non- financial performance. These drivers have a long term impact on the business which can be realized in terms of cash over time.
Q.2:
Explain to John TWO key factors that influence how much cash a business needs to
hold.
It is essential for every business to maintain a certain cash balance. There could be many factors influencing this phenomenon, yet the two key factors that determine how much cash a business needs to hold are (a) Synchronization of cash inflows and out flows, (b) Short cost or cost of cash balance.
Synchronization of cash inflows and out flows
The timings of cash receipts and cash payments does not always coincide, therefore it is important for a business to hold cash to fill this gap. If the timings of the cash inflows matched perfectly with those of cash outflows, there would be no need of holding cash balance. This non-synchronization determines the amount of cash a business needs to maintain. To serve the purpose the cash flows should be forecasted over a time period while preparing the cash budget.
Short cost or cost of cash balance.
The second key factor that influences the amount of cash to be maintained by the firm is the short cost, it is the cost associated with maintaining extra cash, or meeting the shortfall of the cash.
When the business is holding extra funds, then surely it is not investing these. Also if the business is not maintaining adequate cash balance, it will have to arrange for extra funds to counter any unexpected need of cash on urgent basis. Even if there is an expected shortage, yet an arrangement of funds would be necessary and this will cost the business may be higher than normal cost of raising funds.
Short costs include Transaction costs, Borrowing costs, Loss of cash-discount, Excess Cash Balance Costs, Procurement and Management cost etc. The business is well aware of the magnitude and frequency of occurrences of these costs, hence these costs influence the determination of minimum amount of cash to be maintained by the business.
Q.4:
Explain to John whether, and why, giving credit to customers is a source of cash or a use of cash.
Giving credit to the customer, or in accounting terminology, the account receivable are the payments that are the companies’ claim to the customer. Your credit to the customer definitely worth money, as soon as the customer pays his invoice, you get your money in your hands. Accounts receivables are accounted as current assets, these are resources. These could prove to be beneficial for the business. Credit given to the customers can be used a collateral for taking out asset based loans, as the banks and companies also consider your account receivables as assets.
Aside from monetary benefits, giving credits creates a sound customer relationship, if the company’s policy is to abstain from giving credits or offering below competitive payment terms, it would be very unwise and might result in losing confidence of people in the company. So, giving credits to the customers would be beneficial for JJ and son, as it is an alternate source of cash, and a solid measure of gaining faith of the customers.
