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

2. Working Capital

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

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

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

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

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

8. 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.

9. 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?

10. 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.

11. 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

12. 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.

13. 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

14. THE LIFEBLOOD OF A BUSINESS
WORKING CAPITAL
THE LIFEBLOOD OF A BUSINESS

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

16. 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

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

18. Is this Capital or Revenue Expenditure?
Marketing expenditure
Revenue
Expenditure

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

20. Is this Capital or Revenue Expenditure?
Ink cartridges
Revenue
Expenditure

21. Is this Capital or Revenue Expenditure?
Inventories
Revenue
Expenditure

22. Is this Capital or Revenue Expenditure?
Office Equipment
Capital
Expenditure

23. Is this Capital or Revenue Expenditure?
Salaries
Revenue
Expenditure

24. Is this Capital or Revenue Expenditure?
New factory
Capital
Expenditure

25. Depreciation

26. 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

27. 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!

28. 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)

29. Read article on depreciation.
Homework
Read article on depreciation.

30. Your go…
Anyone for Bingo?