Working Capital Control What is it? Essentially net current assets (but strictly speaking should exclude cash) Why is it important? Cash tied up in day-to-day operations The business cannot continue without it It has to be funded from somewhere If business runs out of cash, it will fail

Why do we need to control it? Use cashflow forecast to work out how much cash we need to borrow/invest To keep working capital to a minimum (and hence free up cash for other purposes): keep stocks low keep debtors low delay payment to creditors BUT if working capital too low (or negative), risk bankruptcy fail to meet liabilities as they fall due

Cash Flow Forecast

Cashflow Forecast Example - Carruthers

Bank Reconciliations You can check the cash at bank (or bank overdraft) balance in the accounts by comparing it to the balance on your bank statement. The two figures are unlikely to agree exactly - this does not mean that the balance in the accounts is wrong. Acceptable differences are cheques that have not yet cleared (deposits and payments). Other differences should be adjusted.

Bank Rec. Example Balance per bank statement = £351.05 Balance per cash book (accounts) = £319.04 Why are they different? 3 cheques you have issued have not cleared 1 deposit has not been cleared the bank has made an error with the amount of another deposit these are all acceptable differences

Bank Reconciliation as at 30 Nov £ £ Balance per bank statement Less: outstanding cheques Add: outstanding deposit Less: error on statement Balance per cash book

Daphne Ltd Example Acceptable differences are cheques outstanding (not yet presented) and deposits not yet credited (cleared). But we must adjust for investment income, bank charges and standing order as we should have entered these in the books (accounts). Nb. typo: statement date 30.6.01 not 00

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Ratio Analysis Ratios of accounting numbers are useful to analyse the position and performance of a business. It is important to compare ratios over time (trends), or to budgets, or to other businesses/industry averages. By themselves they are meaningless.

Profitability Ratios Gross Profit Ratio = Gross Profit  100% Sales Net Profit Ratio = Net Profit  100% ROCE = PBIT  100% Capital Employed

ROCE ROCE is very important. Can split ROCE as follows: ROCE = Net Profit Ratio  Capital Turnover Ratio as long as you use PBIT in Net Profit Ratio Capital Turnover Ratio = Sales . Capital Employed

Liquidity (Working Capital) Ratios Use Stock Turnover Ratio to see whether the Current or the Quick Ratio is the most appropriate liquidity ratio to use. High/quick stock turnover - Current Ratio Low/slow stock turnover - Quick Ratio Also look at Debtor and Creditor Days to determine changes in payment/collection periods (affect cash cycle of business).

Stock Turnover Ratio = Cost of Sales Inventory Held OR Inventory Held  365 days (no. of days) Cost of Sales

Current Ratio = Current Assets . Current Liabilities Quick Ratio = Current Assets – Stock the quick ratio is sometimes also called the ‘acid test’.

Debtor Days = Trade Debtors  365 days Total Credit Sales (how long it takes your customers to pay) Creditor Days = Trade Creditors  365 days Total Credit Purchases (how it takes you to pay your suppliers) if you don’t have purchases, use C.O.S.

Efficiency Ratios Tell you how well you use your assets to generate income. Capital Turnover Ratio Fixed Assets Turnover Ratio = Sales . Fixed Assets Book Value

Gearing Ratios Debt to Equity = Long-Term Liabilities Capital + Reserves Debt to Capital Employed = Long-Term Liabilities Capital Employed

Investor Ratios Dividend Yield = Div Per Share  100% Market Price per Share Note: You need market price to calculate this but it may not be available. Dividend Cover = Net Profit Before Ord Divs Ord Divs paid and proposed

Earnings per Share = Earnings Before Ord Divs No. of Ordinary Shares Issued companies like Somerfield report this at bottom of the profit and loss account Price Earnings Ratio = Market Price per Share (PE Ratio) Earnings per Share

Writing Reports Title page Contents page Executive summary Terms of reference Introduction Several sections dealing with content Conclusion Appendices