BUS627 Week 3 Discussion

BUS 627 Week 3 Discussion

Question 1(Balquis)

When running a business it’s important for management to control cash to ensure business expenses are being paid, theft is not occurring, enough cash is on hand in the event of emergencies, but also investing extra cash to increase the value of the business. Some tools that management may use to control cash are the cash flow statement which shows what cash is leaving and entering the business (Murphy, 2021). Specifically, “cash from operating activities, cash from investing activities, and cash from financing activities” (Murphy. 2021). Other tools that management can utilize to control cash are bank reconciliations, petty cash funds, and setting up internal controls to ensure employees are not misusing company funds (Porter, 2018). These are just a few of the many ways management controls cash.

The company I have chosen the past two weeks to do these assignments on is General Motors. The company’s cash balance is located below per GM's annual report. In reviewing these numbers General motors does not seem to have too much or too little cash as their numbers align with what their competitors are doing like Ford and Honda. For example, both company’s have a 1 to 1 ratio of how much they are investing to how much cash/cash equivalents are on hand. Also it seems that Honda and Ford both increased their cash/cash equivalents since the pandemic started. This make sense as company’s were looking to keep liquid to prepare for the unknown of the pandemic. Per Cohn (2021), “The pandemic has prompted many companies to pay extra attention to their cash flow and liquidity level”, in addition to at least 10% changing their liquidity plan or increasing their liquidity. Overall the norm right now seems to be for companies to be more liquid than they typically would.

General Motors	2020	2019
Net cash provided by operating activities	16670	15021
Net cash used in investing activities	-21826	-10899
Net cash provided by (used in) financing activities	5552	-4677
Cash, cash equivalents and restricted cash at end of period	23117	22943
Significant Non-cash Investing and Financing Activity	0	0

In addition to the above, it’s important for for management to establish basic internal controls to protect the assets of the company as a whole and to ensure that the accounting is accurate. Acts such as the Sarbanes oxley act of 2002 states the managements responsibility is the following as per Porter & Norton (2018):

1. State its responsibility to establish and maintain an adequate internal control structure and procedures for financial reporting.

2. Assess the effectiveness of its internal control structure and procedures for financial reporting

Violations of this act can lead to hefty fines and even jail time. A real life work example I have encountered of basic internal controls is when working at the bank we would get randomly audited as tellers to ensure we have not stolen from our cash box, in addition, you had to report if your cash box was under or over at the end of the night no matter if it was pennies. Petty cash was also not allowed, and the obvious cameras on at all times.

 

Question 2(Jessica)

It is very important to control cash to ensure smooth functioning of any business.  Businesses need to make sure they don’t have too much cash on hand in case of theft but need to make sure enough is available for suppliers, employees, taxing agencies, banks and other creditors can be paid on time.  One important tool in cash management is the cash flows statement.  Other important tools is cash budgets, bank reconciliations and petty cash funds.  Bank statements help monitor cash, providing detailed lists of all activity for a particular account during the month.  Bank reconciliation should be prepared for each individual bank account as soon as the bank statement is received as it will help solve any differences between the banks’ recorded balance and the balance that appears on the company’s books if they are different.  Petty cash funds are funds that consists of coin and currency that is kept on hand to make minor disbursements.

In 2020, Starbucks had $1.6 billion in cash provided by operating activities.  Contractual obligations that the coffee maga company totaled was $354113 million.  With the amount of money that Starbucks brought in from operating activities, they would have enough cash to cover the financial obligations such as operating lease, debt, and purchase obligations.

Management establishes policies and procedures on a number of different levels to ensure that corporate objectives will be met, some being in writing.  Some of the most important internal control procedures that management will or can use is proper authorizations, segregation of duties, independent verification, safeguarding of assets and records, independent review and appraisal, and lastly design and use of business documents.  In my job, everything we do is established by internal controls; our job is written out in step by step procedures, policies are in writing on which section does what, and policies are in place for dress and appearance as far as what we can wear in uniform, what kind of jewelry, how we can have our hair.

 

Question 3(Diana)

Starbuck’s average asset life in 2020 is 4.36 years and in 2019 was 4.67. To get these results, we have to divide the value of property, plant, and equipment (PPE) by the depreciation for the year. Therefore, indicating the average life of assets that the company can use and information on when one should purchase or replace the PPE.  In 2020 Starbucks purchased $ 1483.6 million (from the consolidated statement of cash flows), resulting in an increase in the value of PPE that affects the average life. The average age of assets in 2020 and 2019 is 5.53 years and 5.69. We get this by dividing the accumulated depreciation by the depreciation for the year. Therefore indicating the average age of assets that the company has used in its operations. As Starbucks uses the straight-line method of depreciation, analysis of average age arrived by computing is fair. This indicates when to renew the PPE to maintain the level of production. The assets turnover ratio measures how efficiently the company is utilizing its assets in generating revenue. For the year 2020, it is 0.97 and in 2019 it is 1.22. In 2020, the ratio is declined by 0.25 which is 20.81% of 2019’s this is because of a decrease in sales value and an increase in assets value during the year 2020. The major increase of total assets during the year is due to the operating lease which is not recurring but still, the company has to improve utilization of assets in generating sales as the lower ratio implies the poor efficiency in inventory management, utilization of fixed assets, or collection methods.

 

The accounts receivable turnover ratio shows the efficiency of the company in collecting receivables. It indicates the operational and financial performance of the company. A high ratio indicates that the company is more efficient in the collection of receivables whereas a low ratio indicates the poor efficiency of the company in collecting receivables. In 2020 the ratio is 26.69 whereas in 2019 it is 33.72. As the value of sales decreased the ratio also reduced but still the company has a good turnover ratio. The company has to take measures to improve the ratio and ensure not to decline further. Starbucks can offer discounts and shortening the credit period (change in credit policy) will result in an increase in collections. Accounts receivable turnover ratio in days implies the average number of days taken by customers to repay their debts i.e, the average number of days taken for a company to collect its receivables from customers/ debtors. In 2019 it is 11 days, it was increased to 14 days in 2020 which is 26.36% of 2019. Based on accounts receivable turnover ratio changes in days also changes. As the ratio decreases, the average collection period increases. But average collection in 14 days is not that too bad when compared to the industry average (Accounts receivable turnover ratio is 10). The company has to take certain measures to ensure increased collections by decreasing average collection days.

 

Question 4(Monqiue)

Analysis of age and composition of the most productive assets of a company assess the long-term assets and asset turnover which helps companies thrive. Companies who use the straight-line method of depreciation can use such analysis (Porter & Norton, 2018).  UPS states in its Annual Report that both depreciation and amortization are provided by straight-line method over the estimated useful lives of the assets, including aircrafts, buildings, leasehold improvements, plant equipment, technology equipment and vehicles (UPS, 2021).

 

Average Life of Assets	Average Age of Assets	Asset Turnover
$62,091	$29,837	$84,628
$2,698	$2,698	$62,408 + $57,857/2= $60,133
=23.01	=11.05	»1.41

 

UPS has average age and life showing that assets have a lifespan that is able to be productive and positive for UPS.  The asset turnover ratio is important in showing UPS’ profitability through measure of the assets’ productivity (Porter & Norton, 2018).  UPS’ asset turnover ratio shows that each dollar of assets in 2020 produced $1.41 in sales, displaying positive productivity of sales for the future of the company.

The accounts receivable turnover ratio is used by managers, investors and creditors to manage a company’s account receivable (Porter & Norton, 2018). The ratio is found doing the following formula:

 

Accounts Receivable Turnover	Number of Days’ sales in receivables
$84,628	360
10,750 + 9,552/2 = 10,151	8.3
=8.3	=43

 

The ratio shows that in in Fiscal Year 2020, UPS turned over its accounts receivable an average of 8.3 times.  Converting to days, that would be 43 days of the year where there’s account receivables outstanding.  Ultimately, it takes UPS 43 days or less on average to collect accounts receivable in 2020.  Makes a lot of sense that this number would be higher than a normal 30-day period because of business-related losses due to the pandemic (in other words, I speculate that businesses and individuals were behind in paying the UPS bill).