3.3 Working Capital

What are six benefits of cash flow forecasting?

1. Detecting possible problems before they occur and planning solutions 2. Encouraging proactive planning and preparing solutions 3. Contingency planning 4. Banks often require them when loans are requested 5. Renegotiation of creditor and debtor terms may be necessary 6. Assist businesses in achieving goals

What are four examples of fixed Assets?

1. Land and buildings 2. Machinery 3. Vehicles 4. Furniture

What are three examples of current liabilities?

1. Overdrafts 2. Creditors-suppliers who sold materials or components on credit to the business or banks who lent the business short term loans. 3. Dividends payable

What are 5 short term solutions?

1. Overdrafts 2. Selling fixed assets and leasing them back 3. Selling dormant assets 4. Debt factoring 5.Bank loans

What are 9 reasons for cash flow problems?

1. Overtrading-expanding too quickly 2. Over borrowing 3. Over stocking 4. Poor collection system or credit control 5. Poor credit terms from suppliers 6. Poor credit control/extended credit periods to debtors or weak collection department 7. Long chain of production 8. Seasonality 9. Unforeseen circumstances

What are 9 limitations of cash flow forecasting?

1. Poor market research 2. Demotivated workers may produce substandard quality products leading to lower demand than expected 3. Machine failures may lead to production delays and loss of customers 4. Fierce competition may lead to loss of sales and market share 5. Economic changes such as an unanticipated rise in inflation may render the forecast useless 6. Sudden changes in consumer taste 7. External shocks such as epidemics 8. Natural disasters such as earthquakes 9. Forecasts have an element of unreliability built in

What are the thee types of currents assets?

1. Stocks/inventory- the merchandise the business sells 2. Debtors-parties who owe the business money 3. Bank/Cash-liquid money in the bank's current account

What are the two things that insolvency leads to?

1. Voluntary closure 2. Compulsory closure as creditors take legal action against the business for failure to pay its debts. This leads to liquidation, which is selling off the business assets to repay creditors their money.

What are current liabilities?

Amounts owed by the business which must be paid within a year.

Define Current assets:

Assets used once and can be turned into cash easily

What's the difference between cash and profit?

Cash 1. Is a current asset 2. Calculated (cash in - cash out) 3. May increase from loans or decrease from lending 4. Only reported when the actual payment or receipt occurs 5. Is reported in the balance sheet and the cash flow statement 6. Is unaffected by depreciation Profit 1. Is the reward for entrepreneurs 2. Calculated (Revenue - cost) 3. Does not change from loans or lending unless interest is charged as an expense. Hence, decreases 4. Is reported in the trading profit and loss account 5. Decreases from depreciation

What's the difference between a cash flow forecast and a cash flow statement?

Cash flow forecast is an estimate of what the business expects cash in versus cash out will be in a future period. (managerial accounting) Cash flow statement is an actual account of cash in and cash out in a given period (past). It is a statement required by government. (financial accounting)

What is a cash flow forecast?

Cash flow forecast-a cash budget in which cash in and cash out are compared. These may be produced quarterly, bi-yearly, or as many times as a business deems necessary.

Explain working capital management:

Cash flow into and out of a business must be managed if the working capital management is to succeed.

What are 8 long term solutions to cash flow problems?

Debt factoring Cash sales only Change price Improve product portfolio Improve marketing planning Economies of scale Seek alternative credit terms or suppliers Better stock control

What is cash?

It is a current asset calculated by the formula: Cash in - cash out Cash in refers to any liquid money flowing into the business while cash out refers to any liquid money flowing out of the business.

What is the significance of working capital?

Lack of working capital/liquidity not profitability is the single most frequent reason for business failure. Lack of liquidity leads to the inability to pay for current liabilities, i.e. meet short term payment commitment, insolvency.

What is Working Capital?

The liquidity available in a business to cover day to day expenses and commitments.

What is the working capital cycle?

The time between paying for costs of production and receiving the revenue from selling the product.

What are Fixed Assets?

objects owned by the business which can be used over and over, but not easily turned into cash.