Topic 3: Accounts & finance
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 Working Capital
• Working capital cycle
• Cash-flow forecasts
• Management of working capital.
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
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.
Working Capital
Stock
Creditors
Debtors
Cash
Working Capital Cycle
• Period of time between spending cash
on production process and receiving
cash payments from customers.
Some terms...
• Cash flow
– 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 shortterm debts
Cash Flow
• Cash Inflows
– Payments in cash
received from customers
(debtors) or the bank.
• Cash Outflows
– Payments in cash by the
business to suppliers
and workers.
Cash Flow Forecasts
• Estimating future
cash inflows and
outflows
• Usually done
month-by-month
basis
Cash Flow Forecasts
• Centre of business plan
• Lenders able to see
possible returns.
• Foresee liquidity problems
• Forecast not omniscient
Key Terms
• Net monthly cash flow
– 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
Possible Inflows
• Cash Received
• Cash Sales
• Credit Sales
• Payments by Debtors
• Sale of Assets
• Capital Injection
• Any other cash inflow?
Possible Outflows
• Rent
• Materials
• Rates
• Wages / Labour
• Lease
• Overheads
• Interest
• Other costs?
Cash Flow Forecasts
Item
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
Jan
Feb
Mar Apr May
Jun
Over to you...
• S&S Textbook from Pg. 199
• Cash Flow Handout
– Complete and discuss
Increase Cash Flow
• Overdraft
• Short-term loan
• Sale of Assets
• Sale and leaseback
• Reduce credit terms to customers
• Debt factoring
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)