Working Capital Accounts & Finance

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

Management of working capital (Dealing with liquidity problems) Improving cash flow, needs effective management of current assets and current liabilities Can be done in 3 ways Seeking alternative sources of finance Improving cash inflows Reducing cash outflows

Seeking alternative sources of finance Overdrafts – temporarily taking out more money – but there is interest and approved lenders may not give out money to firms with liquidity problems Sale and leaseback – Selling fixed assets and leasing them back Selling off fixed assets – not advisable unless unavoidable Debt factoring – external company takes over the collection of debts Government assistance – grants, subsidies Growth strategies – joint ventures, takeovers

Improving cash inflows Tighter credit control – Limit trade credit, reduce time limits Cash payments only – customers may go elsewhere Change pricing policy – cut prices Improved product portfolio – generate more sales from a range of market segments – diversifying includes costs and risks Improved marketing planning – can better meet the needs and demands of the market

Reducing cash outflows Seek preferential credit terms – extended time to pay with suppliers and creditors – administrative costs Seek alternative suppliers – may be able to offer stocks at a cheaper price BUT they may be a lower quality Better stock control – JIT system but wont work for firms that offer services Reduce expenses – identify costs that can be reduced without jeopardising quality (company car)