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