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3.3 Working Capital

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by

Mario Alvarado M.

on 18 October 2013

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Transcript of 3.3 Working Capital

Notes
Cash Inflows (Receipts)
Cash Outflows (payments, expenses, outgoings)
Net Cash Flow
WORKING CAPITAL
Introduction
Cash
: a current asset. Can be held 'in hand' or 'at bank'.
The other two main current assets:
stocks
and
debtors
.
The Working Capital Cycle
The Difference Between Cash and Profit
If a firm sold $5,000 of goods in a week, with 60% of its customers paying by cash, then only $3,000 cash is received. The other 40% (or $2,000) is not received until the end of the credit period. Hence, the sales revenue ($5,000) is not the same as the cash inflow ($3,000) at the end of the trading week.
CASH FLOW FORECASTS
A cash flow forecast is a financial document that shows the expected movement of cash into and out of a business, per time period. It is based on three key concepts:
Conclusion
Current assets
=
Cash
+
Stocks
+
Debtors
Liquidity
: how easily an asset can be turned into cash
A lack of working capital will lead to
insolvency
(where working capital is insufficient to meet current liabilities)
CURRENT ASSETS
CURRENT LIABILITIES
WORKING CAPITAL
=
-
The amount of working capital shows the funds that are available for a business to pay for:
Immediate costs
Expenditure (AKA running costs)
The resources that belong to a business that are intended to be used within the next 12 months.
AKA liquid assets
CASH
DEBTORS
STOCKS
The money that a business owes that needs to be repaid within the next 12 months.
OVERDRAFTS
CREDITORS
TAX
Usually come from sales revenue, when customers pay for the products that they have purchased. It can also come from payment by debtors, loans from a bank, interest received from bank deposits, the sale of assets and rental income.
Cash usually leaves a firm when bills have to be paid. Detailed operations budget: labor, purchase of stocks, rent, taxes, payments to creditors, advertising, interest repayments and dividends.
The difference between cash inflows and cash outflows, per period of time. Ideally, it should be positive, but a firm may be able to temporarily survive if it's negative.
In addition to the three key components in a cash flow forecast, there are two other important parts:
Opening Balance:
The amount of cash at the beginning of a trading period. Notice that the opening balance is the same value as the preceding month's closing balance.
Closing Balance:
The amount of cash at the end of a trading period. It is calculated by:
Closing Balance
=
Opening Balance
+
Net Cash Flow
Study the cash flow forecast below to complete the missing values:
Step 4
Full transcript