1. Working Capital Control
What is it?
Essentially net current assets (but strictly speaking should exclude cash)
Why is it important?
Cash tied up in day-to-day operations
The business cannot continue without it
It has to be funded from somewhere
If business runs out of cash, it will fail

2. Why do we need to control it?
Use cashflow forecast to work out how much cash we need to borrow/invest
To keep working capital to a minimum (and hence free up cash for other purposes):
keep stocks low
keep debtors low
delay payment to creditors
BUT if working capital too low (or negative), risk bankruptcy
fail to meet liabilities as they fall due

3. Cash Flow Forecast

4. Cashflow Forecast Example - Carruthers

5. Bank Reconciliations
You can check the cash at bank (or bank overdraft) balance in the accounts by comparing it to the balance on your bank statement.
The two figures are unlikely to agree exactly - this does not mean that the balance in the accounts is wrong.
Acceptable differences are cheques that have not yet cleared (deposits and payments). Other differences should be adjusted.

6. Bank Rec. Example Balance per bank statement = £351.05
Balance per cash book (accounts) = £319.04
Why are they different?
3 cheques you have issued have not cleared
1 deposit has not been cleared
the bank has made an error with the amount of another deposit
these are all acceptable differences

7. Bank Reconciliation as at 30 Nov
£ £
Balance per bank statement
Less: outstanding cheques
Add: outstanding deposit
Less: error on statement
Balance per cash book

8. Daphne Ltd Example
Acceptable differences are cheques outstanding (not yet presented) and deposits not yet credited (cleared).
But we must adjust for investment income, bank charges and standing order as we should have entered these in the books (accounts).
Nb. typo: statement date not 00

9. Insert ratio analysis diagram here

10. Ratio Analysis
Ratios of accounting numbers are useful to analyse the position and performance of a business.
It is important to compare ratios over time (trends), or to budgets, or to other businesses/industry averages. By themselves they are meaningless.

11. Profitability Ratios Gross Profit Ratio = Gross Profit  100% Sales
Net Profit Ratio = Net Profit  100%
ROCE = PBIT  100% Capital Employed

12. ROCE ROCE is very important. Can split ROCE as follows:
ROCE = Net Profit Ratio  Capital Turnover Ratio
as long as you use PBIT in Net Profit Ratio
Capital Turnover Ratio = Sales
Capital Employed

13. Liquidity (Working Capital) Ratios
Use Stock Turnover Ratio to see whether the Current or the Quick Ratio is the most appropriate liquidity ratio to use.
High/quick stock turnover - Current Ratio
Low/slow stock turnover - Quick Ratio
Also look at Debtor and Creditor Days to determine changes in payment/collection periods (affect cash cycle of business).

14. Stock Turnover Ratio = Cost of Sales
Inventory Held OR
Inventory Held  365 days (no. of days)
Cost of Sales

15. Current Ratio = Current Assets . Current Liabilities
Quick Ratio = Current Assets – Stock
the quick ratio is sometimes also called the ‘acid test’.

16. Debtor Days = Trade Debtors  365 days Total Credit Sales
(how long it takes your customers to pay)
Creditor Days = Trade Creditors  365 days
Total Credit Purchases
(how it takes you to pay your suppliers)
if you don’t have purchases, use C.O.S.

17. Efficiency Ratios
Tell you how well you use your assets to generate income.
Capital Turnover Ratio
Fixed Assets Turnover Ratio =
Sales
Fixed Assets Book Value

18. Gearing Ratios Debt to Equity = Long-Term Liabilities
Capital + Reserves
Debt to Capital Employed =
Long-Term Liabilities
Capital Employed

19. Investor Ratios Dividend Yield = Div Per Share  100%
Market Price per Share
Note: You need market price to calculate this but it may not be available.
Dividend Cover =
Net Profit Before Ord Divs
Ord Divs paid and proposed

20. Earnings per Share = Earnings Before Ord Divs
No. of Ordinary Shares Issued
companies like Somerfield report this at bottom of the profit and loss account
Price Earnings Ratio = Market Price per Share
(PE Ratio) Earnings per Share

21. Writing Reports Title page Contents page Executive summary
Terms of reference
Introduction
Several sections dealing with content
Conclusion
Appendices