1. Topic 3: Accounts & finance

2. 3.3 Working Capital
LO1: Define working capital and explain the working capital cycle.
LO2: Prepare a cash-flow forecast from given information.
LO3: Evaluate strategies for dealing with liquidity problems.

3. 3.3 Working Capital Working capital cycle Cash-flow forecasts
Management of working capital.

4. Working Capital
Measure of ability to meet short-term debts or obligations.
Needed to pay for raw materials, day-to-day running costs and credit offered to customers.
Difference between current assets and current liabilities
Allows use of factors of production

5. Working Capital Meeting day-to-day obligations involves use of assets.
Resources used in business activity to generate goods or services.
Assets that are capable of being used within the year, for day-to-day operation of business to generate economic activity are referred to as Current Assets.

6. Working Capital
Stock
Debtors
Cash
Creditors

7. Working Capital Cycle
Period of time between spending cash on production process and receiving cash payments from customers.

8. Some terms... Cash flow Liquidation Insolvent
Sum of cash payments to business (inflows) minus sum of cash payments made by it (outflows).
Liquidation
Turning assets into cash (possible punishment for not paying suppliers)
Insolvent
When business cannot meet short-term debts

9. Cash Flow Cash Inflows Cash Outflows
Payments in cash received from customers (debtors) or the bank.
Cash Outflows
Payments in cash by the business to suppliers and workers.

11. Cash Flow Forecasts Estimating future cash inflows and outflows
Usually done month-by-month basis

12. Cash Flow Forecasts Centre of business plan
Lenders able to see possible returns.
Foresee liquidity problems
Forecast not omniscient

13. Key Terms Net monthly cash flow Opening cash balance
Estimated difference between inflows and outflows
Opening cash balance
Cash held at the beginning of the month
Closing cash balance
Cash held at the end of the month.
Next months opening balance

14. Possible Inflows Cash Received Cash Sales Credit Sales
Payments by Debtors
Sale of Assets
Capital Injection
Any other cash inflow?

15. Possible Outflows Rent Rates Lease Interest Materials Wages / Labour
Overheads
Other costs?

16. Cash Flow Forecasts Item Jan Feb Mar Apr May Jun Opening Balance
Cash Inflows
Cash Received
Sale of Assets
Total Cash Inflow
Cash outflows
Rent
Rates
Materials
Wages
Total Cash Outflows
Net Cash Flow
Closing Balance

17. Over to you... S&S Textbook from Pg. 199 Cash Flow Handout
Complete and discuss

18. Increase Cash Flow Overdraft Short-term loan Sale of Assets
Sale and leaseback
Reduce credit terms to customers
Debt factoring

19. Decrease Cash Flow Delay payments to creditors (suppliers)
Delay spending on capital equipment
Use leasing not purchase of capital equipment
Cut overhead spending that does not effect output (reduce promotion)