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Accounts & Finance

Accounts & Finance. Working Capital. Learning Objectives. Define working capital and explain the working capital cycle Prepare a cash flow forecast from given information Evaluate strategies for dealing with liquidity problems . Working Capital. Every business NEEDS cash to function

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Accounts & Finance

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  1. Accounts & Finance Working Capital

  2. Learning Objectives • Define working capital and explain the working capital cycle • Prepare a cash flow forecast from given information • Evaluate strategies for dealing with liquidity problems

  3. Working Capital • Every business NEEDS cash to function • Cash is needed for everyday expenses such as wages and buying stock • Without sufficient working capital (cash) a business will be illiquid (unable to pay its immediate or short term debts – these are their liabilities – creditors, overdrafts) • It may be forced into liquidation

  4. Cash inflows and cash outflows • Cash inflows – payments in cash receivedby a business • Cash outflows – payments in cash madeby a business • Workwith a partner and list 3 cash inflows and 3 cash outflowsthat a businessmayexperience

  5. Main types of cash inflows and outflows

  6. Cash flow can be described as a cycle: • The business uses cash to acquire resources (assets such as stocks) • The resources are put to work and goods and services produced. These are then sold to customers • Some customers pay in cash (great), but others ask for time to pay. Eventually they pay and these funds are used to settle any liabilities of the business (e.g. pay suppliers) • And so the cycle repeats • Hopefully, each time through the cash flow cycle, a little more money is put back into the business than flows out. But not necessarily, and if management don’t carefully monitor cash flow and take corrective action when necessary, a business may find itself sinking into trouble. • The cash needed to make the cycle above work effectively is known as working capital

  7. Where does Working Capital come from? • Simple calculation Current assets – current liabilities

  8. Current assets are? Current assets = Cash + Stock + Debtors Current Liabilities are? Current liabilities refers to the money a business owes that needs to be repaid within the next 12 months. E.g. Overdrafts, Creditors, Tax

  9. Calculating Working Capital • If you’re showing current assets of £100,000 and current liabilities of £80,000, your working capital is……? • £20,000 • While any current assets are great, cash is better - especially now! Why?

  10. Managing working capital • The objective of managing working capital is to ensure there is always enough cash on hand: • to pay bills as they become due, • to purchase enough inventory and stock to meet demand • and to have enough sales to support expenses.

  11. Cash management • Cash management is an essential, yet often neglected, component of business management • We have all heard the statement that "most companies do not fail from lack of profit, but from lack of cash" • It is also true that a period of dramatic sales increases will most likely be a company's most profitable, but will also likely be the period of greatest cash flow needs

  12. Remember Currentassets – Currentliabilities

  13. How much working capital should a business have? • It depends on: • Volume of sales • Size of trade credit offered to it • Whether the business is expanding or not • Length of operating cycle (from paying for raw materials to receiving payment from customers) • The rate of inflation

  14. Factors affecting level of working capital

  15. WORKING CAPITAL THE LIFEBLOOD OF A BUSINESS

  16. Capital & Revenue Expenditure • Capital expenditure – on items that will be used time & time again, that will continue to help the business in the following years – is known as capital expenditure • Revenue expenditure – spending on day to day items for the running of the business. Need Working capital for this

  17. REVENUE expenditure Or • CAPITAL expenditure ?

  18. Is this Capital or Revenue Expenditure? Marketing expenditure Revenue Expenditure

  19. Is this Capital or Revenue Expenditure? New fleet of company cars Capital Expenditure

  20. Is this Capital or Revenue Expenditure? Ink cartridges Revenue Expenditure

  21. Is this Capital or Revenue Expenditure? Inventories Revenue Expenditure

  22. Is this Capital or Revenue Expenditure? Office Equipment Capital Expenditure

  23. Is this Capital or Revenue Expenditure? Salaries Revenue Expenditure

  24. Is this Capital or Revenue Expenditure? New factory Capital Expenditure

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