Your go… Sort the cards…. Into assets & liabilities Into non current & current Can you lay them out into a balance sheet order???

Working Capital

Homework owing Multi choice worksheet from last lesson…. Mark your own work…

Multi choice answers A B C Did you mainly get A’s??? One day I might change the order/results of that MC!

Aims of today For you to understand the importance of working capital & depreciation To know the difference between capital & revenue expenditure.

What is working capital? It is the essential money needed for day to day running of the business

Current assets Current liabilities Balance sheet theory Working capital Current assets less Current liabilities Mrs Gordon & Mr Montana notes

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.

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?

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.

How much working capital should a business have? Balance sheet theory 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 Large volumes = need more raw materials Large trade credit = need larger WC to pay for this in LR Expansion = more WC for costs SHORTER operating cycles = less WC Low inflation = low WC needs (cheaper!) Art gallery U2 for a stadium tour? BA? Asda? Mrs Gordon & Mr Montana notes

Factors affecting level of working capital Explanation Need to hold inventories Some businesses need to hold substantial inventories to meet customer needs – e.g. retailers and distributors Production lead time A product that is made and sold within a short time (e.g. fresh food) requires much less inventory than one where the production process takes a long time (e.g. production of mature cheese!) Lean production Businesses that successfully implement lean production techniques find that they need to hold significantly less inventory Customer credit period In some industries it is expected that a long credit period can be taken before trade debtors need to settle their invoices – which means that higher working capital is required Effectiveness of credit control A poorly managed credit control department will allow customers to take too much credit and take too long to settle their bills – which will mean higher trade debtors and higher working capital Supplier credit period The longer the credit offered by suppliers, the better for cash flow and working capital.

Balance sheet theory From Surridge p 21 Handout – reviews the pros & cons of different ways to solve working capital problems. Need to talk through the key issues = stress that this is analysis issues From Surridge p 21 Mrs Gordon & Mr Montana notes

THE LIFEBLOOD OF A BUSINESS WORKING CAPITAL THE LIFEBLOOD OF A BUSINESS

You need working capital for some of this! Business expenditure You need working capital for some of this!

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

Whiteboard activity On your whiteboard write on one side… REVENUE expenditure And on the other CAPITAL expenditure

Is this Capital or Revenue Expenditure? Marketing expenditure Revenue Expenditure

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

Is this Capital or Revenue Expenditure? Ink cartridges Revenue Expenditure

Is this Capital or Revenue Expenditure? Inventories Revenue Expenditure

Is this Capital or Revenue Expenditure? Office Equipment Capital Expenditure

Is this Capital or Revenue Expenditure? Salaries Revenue Expenditure

Is this Capital or Revenue Expenditure? New factory Capital Expenditure

Depreciation

What is depreciation? Depreciation is the reduction in the value of an asset over a period of time. Some typical assets that depreciate Computers, printers, software. Office furniture. Equipment: telephones

What causes depreciation? Time – through wear & tear. It’s better to be pessimistic when depreciating an asset. Use – the more the asset is used, the quicker it will wear out. Technology – with newer alternatives that replace ‘older style’ equipment, making it obsolete!

Why does depreciation matter? It is used by businesses to show the reduction in value of its assets. This calculation should be ‘true & fair’….. but can often be used to window dress the company’s EQUITY (balance sheet)

Read article on depreciation. Homework Read article on depreciation.

Your go… Anyone for Bingo?