1. Management of Working Capital

2. Balance Sheet A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The balance sheet must follow the following formula: Assets = Liabilities + Shareholders' Equity

3. Introduction to Balance Sheet Accounts

4. What is working capital? Working capital = current assets – current liabilities Current assets are the relatively liquid (easily converted to cash) assets of the business. E.g. cash, debtors (amounts owed by customers) and stock. Current liabilities are debts that are due in the short term (less than one year). E.g. short term loans and creditors (amounts owed to suppliers); overdrafts. It is the money needed for the day to day running of the business. Without working capital a business is unable to pay for expenses such as wages, rent and electricity.

5. The Working Capital Cycle

6. Working Capital

7. Sources of liquidity problems Poor working capital = poor liquidity Liquidity problems can arise from: Overtrading – growing too quickly Spending too much on fixed assets Holding too much stock Allowing too much credit to customers Buying too much on credit Borrowing too much money Failing to take into account inflation when setting prices Unexpected events causing unforeseen expenditure Unexpected falls in demand Seasonal factors Poor money management

8. Resolving liquidity problems Ultimately, businesses should try to avoid liquidity problems. However, if they do arise, the following are possible solutions to ensure their survival: Sell off stock of finished goods – using discounts if necessary; Sell off stock of raw materials at below cost if necessary; Sell fixed assets that are not absolutely necessary; Sell fixed assets and lease them back; Make every effort to collect money from debtors; Sell debts to a factoring company; Reduce purchases to essential items only; Make arrangements with suppliers to extend credit terms; Better stock control Negotiate additional short term loans.

9. Task time Page 364 and 365

11. Note: A profitable business may run out of cash, whilst the business recording a loss may have a cash surplus. How is this possible?  The business may be selling more of its output on credit. Therefore a profit is being made as the goods are being recorded and sold, but the cash payment from customers will be received sometime in the future. This period of credit may leave the firm dangerously short of cash.  The business may receive cash at the beginning of the trading year from sales made in the previous year. This would increase the cash balance but not affect profit.  Sale of fixed assets will increase cash balances but have no effect on profit

12. Why do businesses prepare cash flow forecasts Cash flow forecasts are drawn up to help control and monitor cash flow in the business. 1. Identifying the timing of cash shortages and surpluses. 2. Supporting applications for finance from banks and other lenders. 3. Forces managers to plan ahead.

13. Cash Flow Forecast: This relates to the expected inflow and outflow of cash. Cash Flow Statement: This relates to the actual flow (in and out) of cash during the past time period. CASH Used to acquire resources Resources used to make goods and services Goods and services sold for cash

14. Not be able to pay its many creditors on time. The possible implications are: creditors may stop supplying goods; discounts will be lost for prompt payments of bills Wages and salary may not be paid on time and this will cause poor motivation; absenteeism; high labour turnover; and industrial unrest. New capital assets cannot be afforded and this can reduce business efficiency. Tax bills may not be paid

15.  Loss of purchasing power: Unless the rate of interest is more than the rate of inflation, the money held in a bank account will actually lose its purchasing power.  Opportunity Cost: Investors do not invest money in a business for the business to store it in a bank account. Investors expect a business to take well managed risks with their money; if the money is in a bank account, the business is possible risk –averse and the investors may remove their investment.

16.  Overtrading  Holding too much stock  High borrowing – therefore high interest payments.  Allowing too many goods to be bought on credit.  Businesses that rely on seasonal trade – during the time that sales are very low, cash still needs to be spent on running the businesses.

17. Example of Cash Flow Statement

18. The receipts of the business represents the monthly income of cash. Payments are the outflows from the business. Net Cash Flow =TR-TP. The opening balance for the next month will be the value of the closing balance in the previous month. The closing balance for one month is found by adding or subtracting the net cash flow for the month from/to the opening balance. Cash Flow Forecasting

19. JulyAugustSeptemberOctoberNovember Receipts Capital injection10,000 Sales revenue 2,0004,0008,00012,00016,000 Total cash in12,0004,0008,00012,000 16,000 Payments Capital Expenditure15,0002,000 4,000 Labour2,0003,0004,0006,000 Materials3,0004,000 Total Payments20,0009,00010,00012,00014,000 Net Cash Flow( 8,000)(5,000)(2,000)0X Opening Balance0(8,000)(13,000)(15,000) Closing Balance (8,000)(13,000)(15,000) Y 1.Calculate the missing values X and Y. 2.State two ways in which the business might be able to improve its forecasted cash flow. 3.Complete the table for December based on the following forecasts Sales revenue raises by 10% from November. Capital expenditure is double the November level. Labor and material costs increase by 25%

20. Tasks Form your own summary of the limitations to Cash flow forecasting – read page 329 to 330 Page 325 question 3.3.3 Page 326 question 3.3.4 Page 329 question 3.3.5 [only a and b]