CIMA F3 Syllabus A. Financial policy decisions - Financing requirements - Notes ^{6 / 12}

Cash deficits will be funded in different ways

depending on whether they are short or long-term. 

Businesses should also have procedures for investing surpluses with appropriate levels of risk and return.

Deficiencies

Any forecast deficiency of cash will have to be funded.

• Borrowing 

  If borrowing arrangements are not already secured, a source of funds will have to be found.
   
  If a company cannot fund its cash deficits it could be wound up.

• The firm can make arrangements to sell any short-term marketable financial investments to raise cash.

• The firm can delay payments to suppliers, or pull in payments from customers. 

  This is sometimes known as leading and lagging.

Because cash forecasts cannot be entirely accurate, companies should have contingency funding available from a surplus cash balance and liquid investments, or from a bank facility.

Cash surpluses

If a cash surplus is forecast, having an idea of both its size and how long it will exist could help decide how best to invest it.

In some cases, the amount of interest earned from surplus cash could be significant for the company's earnings. 

The entity must have procedures for investing surpluses which consider both risk and return.

Sometimes, a company may want to hold surplus cash for the following reasons:

• speculative (to take advantage of unexpected investment opportunities)

• transaction (to finance day-to-day operations)

• precautionary (to provide a buffer in case of unexpected set-backs)