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Topic 3: Accounts & finance

Topic 3: Accounts & finance. 3.3 Working Capital. LO1: Define working capital and explain the working capital cycle. LO2: Prepare a cash-flow forecast from given information. LO3: Evaluate strategies for dealing with liquidity problems. 3.3 Working Capital. Working capital cycle

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Topic 3: Accounts & finance

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  1. Topic 3: Accounts & finance

  2. 3.3 Working Capital • LO1: Define working capital and explain the working capital cycle. • LO2: Prepare a cash-flow forecast from given information. • LO3: Evaluate strategies for dealing with liquidity problems.

  3. 3.3 Working Capital • Working capital cycle • Cash-flow forecasts • Management of working capital.

  4. Working Capital • Measure of ability to meet short-term debts or obligations. • Needed to pay for raw materials, day-to-day running costs and credit offered to customers. • Difference between current assets and current liabilities • Allows use of factors of production

  5. Working Capital • Meeting day-to-day obligations involves use of assets. • Resources used in business activity to generate goods or services. • Assets that are capable of being used within the year, for day-to-day operation of business to generate economic activity are referred to as Current Assets.

  6. Working Capital

  7. Working Capital Cycle • Period of time between spending cash on production process and receiving cash payments from customers.

  8. Some terms... • Cash flow • Sum of cash payments to business (inflows) minus sum of cash payments made by it (outflows). • Liquidation • Turning assets into cash (possible punishment for not paying suppliers) • Insolvent • When business cannot meet short-term debts

  9. Cash Flow • Cash Inflows • Payments in cash received from customers (debtors) or the bank. • Cash Outflows • Payments in cash by the business to suppliers and workers.

  10. Cash Flow Forecasts • Estimating future cash inflows and outflows • Usually done month-by-month basis

  11. Cash Flow Forecasts • Centre of business plan • Lenders able to see possible returns. • Foresee liquidity problems • Forecast not omniscient

  12. Key Terms • Net monthly cash flow • Estimated difference between inflows and outflows • Opening cash balance • Cash held at the beginning of the month • Closing cash balance • Cash held at the end of the month. • Next months opening balance

  13. Possible Inflows • Cash Received • Cash Sales • Credit Sales • Payments by Debtors • Sale of Assets • Capital Injection • Any other cash inflow?

  14. Possible Outflows • Rent • Rates • Lease • Interest • Materials • Wages / Labour • Overheads • Other costs?

  15. Cash Flow Forecasts

  16. Over to you... • S&S Textbook from Pg. 199 • Cash Flow Handout • Complete and discuss

  17. Increase Cash Flow • Overdraft • Short-term loan • Sale of Assets • Sale and leaseback • Reduce credit terms to customers • Debt factoring

  18. Decrease Cash Flow • Delay payments to creditors (suppliers) • Delay spending on capital equipment • Use leasing not purchase of capital equipment • Cut overhead spending that does not effect output (reduce promotion)

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