1. Working Capital

2.  Define working capital and explain the working capital cycle Prepare a cash flow forecast from given information Evaluate strategies for dealing with liquidity problems Learning Objectives

3.  A financial document that shows the expected movement of cash into and out of a business Based on 3 key components  Cash Inflows (Any money coming into the business, sales revenue, bank loans) – Sometimes called receipts  Cash Outflows (payments, expenses, outgoings) – sometimes called payments  Net Cash Flow – Difference between cash inflows and cash outflows 2 essential components  Opening Balance – Amount of cash at the beginning of a trading period (Will be the same as the previous months closing balance) Sometimes the case study will provide you with the first months opening balance otherwise it is usually 0  Closing Balance – Amount of cash at the end of a trading period (Opening balance + net cash flow) Cash Flow Forecasts

4.   Investors require a cash flow forecast in order to help them better assess the financial health of the business  Can help managers anticipate difficulties  Aids planning process  But remember…it is a forecast Reasons for cash flow forecasts

5. All figures in $000JanFebMarApr Cash Inflows Owners capital injection6000 Cash sales3466 Payments by debtors0222 Total cash in9688 Cash Outflows Lease8000 Rent1111 Materials0.5132 Labour1233 Other costs0.51 1.5 Total cash out1157.5 Net Cash FlowNet monthly cash flow(2)10.5 Opening Balance0(2)(1)(0.5) Closing Balance(2)(1)(0.5)0 Sometimes the opening balance is at the top…like on the next example

6. FebMarAprMay Opening Balance 6,00050007,000(3,000) Income2,0003,0004,0006,000 Expenditure3,0001,00014,0003,000 Net Cash Flow (1,000)2,000(10,000)3,000 Closing Balance 5,0007,000(3,000)0

7.  Cash Flows Benefits  By showing periods of negative cash flow, plans can be put into place to provide additional finance  If negative cash flow appears too great, plans can be put into place to reduce Limitations  Mistakes when preparing revenue and costs forecasts – inexperienced staff  Unexpected cost increases  Wrong assumptions  Inaccurate research  Demoralised workforce There can be many limitations, at the end of the day, it’s a FORECAST

8.   One of the problems with having a long working capital cycle is that the business has to pay for expenses well in advance of receiving any cash inflows  If this problem is stretched out it can lead to liquidity problems Causes of cash flow problems

9.   Overtrading – Expanding too quickly without the sufficient resources  Over borrowing – High cash outflow  Overstocking – Business is holding too much stock, stock costs money to buy, produce and store  Poor credit control – Too much credit given to customers  Unforeseen changes - PEST Main causes of cash flow crises:

13.   Working individually and in pairs complete the following tasks, you should BOTH have a copy of your answers  It is important to firstly read the question properly  Secondly, extract the information required – remember examiners love to overload you with information, half of which you DON’T need  Finally, create your tables in pencil in case of any mistakes Task

17. JUNEJULYAUGUSTSEPTEMBEROCTOBERNOVEMBER Ticket Sales0350700680700710 Merchandise0154215204240245 Sponsors950 550 (minus loan payments) Loan40000000 TOTAL INFLOWS 135014541835183418901505 Advertising035 (10% of ticket sales) 70687071 Debts owed (806) 403 0000 Salaries and equipment 812 TOTAL OUTFLOWS 12151250882880882883 NET CASH FLOW 1352049539541008622 OPENING BALANCE (836)(701)(497)45614102418 CLOSING BALANCE (701)(497)456141024183040