Accounts & FinanceWorking Capital
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
A financial document that shows the expected movement
of cash into and out of a businessBased 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
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
All figures in $000 Jan Feb Mar Apr
Cash Inflows
Owners capital injection 6 0 0 0
Cash sales 3 4 6 6
Payments by debtors 0 2 2 2
Total cash in 9 6 8 8
Cash Outflows
Lease 8 0 0 0
Rent 1 1 1 1
Materials 0.5 1 3 2
Labour 1 2 3 3
Other costs 0.5 1 0.5 1.5
Total cash out 11 5 7.5 7.5
Net Cash Flow Net monthly cash flow (2) 1 0.5 0.5
Opening Balance 0 (2) (1) (0.5)
Closing Balance (2) (1) (0.5) 0
MINUS
EQUALS
Sometimes the opening balance is at the top…like on the next example
Feb Mar Apr May
Opening Balance
6,000 5000 7,000 (3,000)
Income 2,000 3,000 4,000 6,000
Expenditure
3,000 1,000 14,000 3,000
Net Cash Flow
(1,000) 2,000 (10,000) 3,000
Closing Balance
5,000 7,000 (3,000) 0
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
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
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:
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
JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBERTicket Sales 0 350 700 680 700 710Merchandise 0 154 215 204 240 245
Sponsors 950 950 950 950 950 550 (minus loan payments)
Loan 400 0 0 0 0 0TOTAL INFLOWS
1350 1454 1835 1834 1890 1505
Advertising 0 35 (10% of ticket sales)
70 68 70 71
Debts owed (806)
403 403 0 0 0 0
Salaries and equipment
812 812 812 812 812 812
TOTALOUTFLOWS
1215 1250 882 880 882 883
NET CASH FLOW
135 204 953 954 1008 622
OPENING BALANCE
(836) (701) (497) 456 1410 2418
CLOSING BALANCE
(701) (497) 456 1410 2418 3040