CPD Spotlight Quiz September Working Capital

Size: px
Start display at page:

Download "CPD Spotlight Quiz September 2012. Working Capital"

Transcription

1 CPD Spotlight Quiz September 2012 Working Capital 1 What is working capital? This is a topic that has been the subject of debate for many years and will, no doubt, continue to be so. One response to the question is that it is the ready cash that keeps the wheels turning. Another might be the classic accounting definition of current assets less current liabilities. To start to answer the question What is working capital? first we need to be clear what we mean by the term. We mean the investment that has to be made in the company in order for it to trade normally. For a manufacturer that means, the investment to buy and stock raw materials, to complete the manufacturing process and to be able to wait for the final customer to pay his invoice the classic asset conversion cycle. So, we can sum that up as stocks plus debtors less creditors. Stock and debtors being the amount that we have to invest, the investment being partly offset by the fact that we don t have to pay for all of it, some is held over as creditors. All of this is fairly basic stuff. The difficulty starts when we ask what the number is. Question 1 What is the best measure for the net investment in working capital? (a) All current assets less all current liabilities (b) All current assets less only trade creditors (c) All stocks plus all debtors less creditors (d) All stocks plus all trade related debtors and creditors (a) The right answer is (d) All stocks plus all trade related debtors and creditors. Stock and debtors are fairly clearly part of the working capital cycle, sometimes called the asset conversion cycle, because they have to be incurred in order to do business. On the liability side the offsetting part of working capital is made up of those items that concern the trading cycle in other words the unpaid trade debts. Most clearly this includes trade creditors. But we also need to include other items concerning the costs of raising raw material to either work-in-progress or finished goods. So we include accruals and other trade related items. What should be excluded is any item that relates to either short term debt, tax payments or dividend payments; these are not to do with the trading cycle, they are funding related or profit related. Payables for employee taxes however could be included as trade related.

2 At the core of this issue is the distinction between working capital and the funding of that working capital. If we don t get this clear then we will always be confused. Current liabilities more strictly creditors due in less than one year includes some items that are trade related and some that are funding related. 2 Funding working capital The problem with the traditional current assets less current liabilities definition is that short term creditors includes a mixture of funding items and trade items. Take an example; a company asks for a loan to fund its working capital. The bank grants a short term loan and all is well. Has working capital increased? Current assets have increased because the company can now fund more stock and debtors. But the short loan is categorised as a short liability so it increases current liabilities. The net effect is that current assets less current liabilities remains the same as long as all of the loan goes towards funding stock and debtors. So do we have more working capital? By the traditional measure, no we don t! We know what has happened in reality, we do have more working capital and it is funded by the new loan. But what would happen if we spent some of the loan proceeds on longer term assets? This brings us to the next core issue of working capital how should it be funded. Question 2 How should working capital be funded? (a) It is all about short assets and liabilities, so the funding should be short. (b) We always need working capital, so it should be long term funding (c) Term funding for the permanent portion and short funding for the seasonal portion (d) This is all theoretical maturity doesn t matter The right answer is (c) Term funding for the permanent portion and short funding for the seasonal portion. The traditional answer is (a) hence the widespread use of the overdraft in the UK and short finance elsewhere. This can be very risky because short finance has to be renewed at maturity and circumstances may not make it easy to renew loans. In the UK, the overdraft is nominally repayable on demand in other words it can be called at the first sign of trouble. Even if repayment could be managed, the cross default clause is very likely to trigger bigger problems. The key is to understand that working capital is a long term asset even though it is made up of recirculating short term assets and liabilities. Rather like a car hire company that always has cars less than a year old, each car is short term but the asset that is the hire fleet is there for the long term. Funding should reflect that.

3 The seasonality of working capital can then be accommodated by taking short term funding for the period when stocks and/or debtors are high. A really cautious approach would be to use all long term funding and accept having excess cash for the off-season. 3 Why does it matter how much working capital we have? The short answer is that it is an investment and we want to get the highest return for the lowest investment if our target is to increase shareholder value. Does extra working capital mean that we can sell more goods? Or charge more for our goods? There may be times when the answer to those questions is yes and then we should encourage more investment. But much of the time the answer is no so we should use less rather than more. We can overdo the pressure on working capital though. For example, if we cut down on stock in a retail operation then we may lose customers because we don t have what they want to buy. If we cut down on debtors by being aggressive with late-payers then again we can lose customers. We need to find the right balance. A very useful metric for analysis and monitoring is the proportion of sales that is tied up in working capital; net working capital % sales. A percentage of sales is a relatively rough measure, but it is surprisingly stable over time as sales levels vary. As sales levels grow, more stock and debtors are needed. As sales levels decline, fewer stocks and debtors are needed. Working capital when sales grow Question 3 Which of the following would have the highest working capital cost of growth? (a) An engineering business making a wide range of steel bearings for short notice draw down by industrial customers (b) A mobile phone operator (c) An advertising agency designing advertisements and buying advertising space (d) A large food retailing business The right answer is (a) an engineering business making a wide range of steel bearings for short notice draw down by industrial customers. The wide range of bearings and the short draw down means that a lot of stock has to be held. Couple that with industrial customers, who buy on credit rather than retail customers who pay cash, and the level of stock and debtors is likely to be high. But what about creditors, the offsetting item? Input costs, and therefore creditors, are likely to be steel and people cost. Debtors and stock are likely to be much higher than creditors giving a high percentage of sales tied up in working capital. Mobile phone operators have a heavy fixed investment but a relatively modest investment in working capital. This is because debtors are relatively small either pay-monthly or prepaid and stock is

4 non-existent. Creditors on the other hand trade creditors accruals and deferred income more than outweigh the investment in debtors. The result is a negative investment in working capital. This is the situation for the large food retailer too. Although the physical amount of stock is high, the relative amount probably averages across products at about a week s worth of sales. Contrast that with the six weeks or so of trade credit that they take and their situation becomes clear. Add in the nature of retailing, i.e. sales are for cash not credit, and it is clear that a food retailer should have a negative investment in working capital. The advertising agency is in broadly the same position, a minimal amount of stock, but possibly high debtors. Offset that with the fact that they can take credit from the purchase of advertising space and again we have low or negative levels of working capital. The key in all of these is that as firms grow, their working capital grows at the same rate a wellmanaged firm will maintain broadly the same proportion of its sales. A high level of working capital means that the investment needed to fund growth is high. If the level of working capital is, say 20%, then if sales grow from 100m to 110m then the working capital needed to fund that growth will be 20% of the growth, i.e. 2m extra investment. Unfortunately the extra stock and debtors has to be paid for before the extra profit on the new sales is received. 4 Working capital and lending risk If growth is pursued without the extra investment the most common problem is overtrading. Most commonly seen in small businesses, this is a management problem as much as a financial problem too much to do, chasing fires all the time. Financially, stock is always short and debtors always being chased earlier than they would normally. The most serious implication of the problem is that, unless the problem is correctly diagnosed, the solutions tend to make things even worse. The problem can easily be seen as a liquidity problem being short of cash. The solution is to get more sales to provide extra profit. Of course, more sales is the last thing needed more sales is the problem not the solution. The other side of the coin of working capital intensity is when sales decline. Question 4 Which of the following businesses is likely to suffer the biggest cash impact when sales decline? (a) An engineering business making a wide range of steel bearings for short notice draw down by industrial customers (b) A small restaurant chain (c) A department store (d) A large food retailing business The right answer is (d) a large food retailing business.

5 The engineer will have a large working capital and so as sales decline, cash is generated as debtors pay up and we have to invest less in new debtors and stock. The restaurant chain and the department store will both probably have a very small level of working capital and so will not suffer a dramatic change in cash. The large food retailer is likely to have a negative working capital, as already described. It is decline in sales that creates the problem here. Normally we get cash from customers before we have to pay suppliers, but when sales decline we have to pay suppliers at our old level of operation while getting in cash at a reduced level. The negative working capital works against us. Growth generates cash but decline consumes cash. If lending facilities were already stretched before sales declined, then this cash consumption can be a major problem. Imagine arguing the case for more borrowing we need to invest more in working capital because sales are declining! So what does the food retailer do? Maybe cut prices to shore up sales? In terms of immediate cash flow, that risks making things even worse, especially if the ploy doesn t increase sales as hoped. The price cut might need to be significant, we don t rush for a 5% discount any more. So in terms of risk for a lender, borrowing for working capital investment may be less risky for the engineer because if things go wrong and sales fall, then cash is generated from reduced working capital and the debt can be repaid. But businesses with negative working capital have exactly the opposite effect debt for working capital here is more risky. 5 Working Capital and Liquidity When we talk about working capital changes growth consuming cash and decline releasing cash we assume that working capital is controlled. In practice that control is very difficult to achieve because it involves the active, successful cooperation of purchasing, selling and production departments. As sales increase it is very tempting to overdo the increases in purchasing, for example. As a purchasing manager the last thing you want to happen is to be caught out and ordering too little you would be blamed for running out of stock. Similarly the production manager authorises more overtime or more hiring than might be strictly necessary for the same reasons. Decline is even harder in practice, reducing stocks and debtors in line with sales is notoriously difficult. A well managed company will accept some variation, but re-impose control fairly quickly. A badly managed company may not realise the problem and suddenly experience cash shortages. Question 5 What is the best measure for determining and forecasting liquidity? (a) A cashier s forecast for the next three months (b) A cash flow forecast for the next three months (c) A projection of current assets less current liabilities (d) A projection of current assets less stocks divided by current liabilities

6 The right answer is (b) a cash flow forecast for the next three months. Cashier s forecasts are said to include detailed knowledge of when individual debtors actually pay. They are useful over very short periods, but for a three month period they may be less reliable because they include the settlement of debtors yet to be invoiced and purchases yet to be made. Without knowledge of sales forecasts and other inputs for a cash flow forecast, this is unlikely to be accurate. Current assets less current liabilities is a confusing measure because both working capital and the means of funding is often included. So, in theory, these are all short term assets and liabilities but the funding for stock and debtors is not always short term in fact would ideally not be short term. A similar problem exists for current assets less stock divided by current liabilities, often called the quick ratio or the acid test. Ratios of current assets and current liabilities can be misleading if they are taken at face value. Many textbooks suggest that an acceptable level for the current ratio is 2. Yet many retailers have ratios much less than 1 because they have large creditors and relatively small stock and debtors and they are certainly not running out of cash. The nature of the business is highly significant in interpreting all ratios these especially. Cash flow forecasts are the only real way of ensuring that cash requirements are within limits i.e. for forecasting liquidity levels. That is why cash flow forecasting has such a high priority in many companies. Liquidity is a slippery concept because all financial problems ultimately resolve themselves into a liquidity problem. Too little profit, too much investment, too much growth; all of them eventually show up as a liquidity problem. 6 The attraction of too much working capital This may seem an odd subtitle how can too much working capital be an attraction? Within the company that is unlikely to be true. But to an acquiror it might be very attractive. Acquirors are attracted to companies that are not well-managed. These are companies that can be bought and then transformed into something better performing. Question 6 As an acquirer, you have identified a poorly managed business that you believe you can transform. At present the investment in working capital is 22% of sales. You believe that you can reduce that dramatically to 20% in the first year of your ownership, 18% in the second year and then finally 15% in the third year. This level of 15% will then be the stable level of working capital investment for the business. What is the acquisition value of this working capital reduction if sales remain constant at 100m per annum and your cost of capital is 10%? (a) 7.0 million (b) 6.3 million (c) 5.7 million (d) 5.0 million

7 The right answer is (c) 5.7 million The gross reduction in working capital is 7m, i.e. 22m down to 15m, but it is spread over three years. The present value, i.e. the impact on the acquisition value, is Year 1 change = 22m - 20m = 2m discounted by one year at 10% = 1.8m Year 2 change = 20m - 18m = 2m discounted by 2 years = 1.65m Year 3 change = 18m - 15m = 3m discounted by 3 years = 2.25m Total = 5.7m This is a one-off gain, extracting the cash investment cannot be repeated year after year. Effectively the business has an excess investment of 7m. That can be taken out over a period of three years but it can t be repeated.

Chapter. Working capital

Chapter. Working capital Chapter 10 Working capital 1 10.1 Working capital Working capital is the capital available for conducting the day-to-day operations of the business and consists of current assets and current liabilities.

More information

The Nature, Elements and Importance of Working Capital

The Nature, Elements and Importance of Working Capital C. WORKING CAPITAL MANAGEMENT 1. The nature, elements and importance of working capital 2. Management of inventories, accounts receivable, accounts payable and cash 3. Determining working capital needs

More information

6.3 PROFIT AND LOSS AND BALANCE SHEETS. Simple Financial Calculations. Analysing Performance - The Balance Sheet. Analysing Performance

6.3 PROFIT AND LOSS AND BALANCE SHEETS. Simple Financial Calculations. Analysing Performance - The Balance Sheet. Analysing Performance 63 COSTS AND COSTING 6 PROFIT AND LOSS AND BALANCE SHEETS Simple Financial Calculations Analysing Performance - The Balance Sheet Analysing Performance Analysing Financial Performance Profit And Loss Forecast

More information

A guide to business cash flow management

A guide to business cash flow management A guide to business cash flow management Contents 01. Cash flow management 01 02. Practical steps to managing cash flow 04 03. Improving everyday cash flow 06 04. How to manage cash flow surpluses and

More information

Chapter 6 The cash flow statement

Chapter 6 The cash flow statement Chapter 6 The cash flow statement The last four chapters have been spent looking at the balance sheet and income statement and how to use them. In this chapter, we will move on to arguably the most revealing

More information

tutor2u Cash Management How and Why Businesses Need to Manage their Cash AS & A2 Business Studies PowerPoint Presentations 2005

tutor2u Cash Management How and Why Businesses Need to Manage their Cash AS & A2 Business Studies PowerPoint Presentations 2005 Cash Management How and Why Businesses Need to Manage their Cash AS & A2 Business Studies PowerPoint Presentations 2005 Importance of Cash (1) A business can exist for a while without making profits but

More information

tutor2u Working Capital Introduction to the Management of Working Capital AS & A2 Business Studies PowerPoint Presentations 2005

tutor2u Working Capital Introduction to the Management of Working Capital AS & A2 Business Studies PowerPoint Presentations 2005 Working Capital Introduction to the Management of Working Capital AS & A2 Business Studies PowerPoint Presentations 2005 Introduction All businesses need cash to survive Cash is needed to: Invest in fixed

More information

Calculating financial position and cash flow indicators

Calculating financial position and cash flow indicators Calculating financial position and cash flow indicators Introduction When a business is deciding whether to grant credit to a potential customer, or whether to continue to grant credit terms to an existing

More information

CIMA F3 Course Notes. Chapter 3. Short term finance

CIMA F3 Course Notes. Chapter 3. Short term finance CIMA F3 Course Notes c Chapter 3 Short term finance Personal use only - not licensed for use on courses 31 1. Conservative, Aggressive and Matching strategies There are three over-riding approaches to

More information

In this chapter, we build on the basic knowledge of how businesses

In this chapter, we build on the basic knowledge of how businesses 03-Seidman.qxd 5/15/04 11:52 AM Page 41 3 An Introduction to Business Financial Statements In this chapter, we build on the basic knowledge of how businesses are financed by looking at how firms organize

More information

Many members will be in some way involved with the control of Working Capital and its influence upon business success.

Many members will be in some way involved with the control of Working Capital and its influence upon business success. Working Capital Control, Philip E Dunn Many members will be in some way involved with the control of Working Capital and its influence upon business success. Working capital is a key element in business

More information

Chapter 3 How to analyse a balance sheet

Chapter 3 How to analyse a balance sheet Chapter 3 How to analyse a balance sheet In the previous chapter we looked at how a balance sheet was put together and the numbers that go into it. In this chapter, we are going to take all those numbers

More information

Having cash on hand is costly since you either have to raise money initially (for example, by borrowing from a bank) or, if you retain cash out of

Having cash on hand is costly since you either have to raise money initially (for example, by borrowing from a bank) or, if you retain cash out of 1 Working capital refers to liquid funds used to purchase materials and pay workers. This is in contrast to long term capital such as buildings and machinery. Part of working capital management is cash

More information

Investing in unlisted property schemes?

Investing in unlisted property schemes? Investing in unlisted property schemes? Independent guide for investors about unlisted property schemes This guide is for you, whether you re an experienced investor or just starting out. Key tips from

More information

RELEVANT TO ACCA QUALIFICATION PAPER F9. Studying Paper F9? Performance objectives 15 and 16 are relevant to this exam

RELEVANT TO ACCA QUALIFICATION PAPER F9. Studying Paper F9? Performance objectives 15 and 16 are relevant to this exam RELEVANT TO ACCA QUALIFICATION PAPER F9 Studying Paper F9? Performance objectives 15 and 16 are relevant to this exam Business finance Section E of the Paper F9, Financial Management syllabus deals with

More information

Notes. CIMA Paper P1. Performance Operations

Notes. CIMA Paper P1. Performance Operations Chapter 5 extract from our ExPress notes for use with the current video. A full set of P1 ExPress notes can be downloaded free of charge at www.. CIMA Paper P1 Performance Operations For exams in 2011

More information

Understanding A Firm s Financial Statements

Understanding A Firm s Financial Statements CHAPTER OUTLINE Spotlight: J&S Construction Company (http://www.jsconstruction.com) 1 The Lemonade Kids Financial statement (accounting statements) reports of a firm s financial performance and resources,

More information

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle

9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9. Short-Term Liquidity Analysis. Operating Cash Conversion Cycle 9.1 Current Assets and 9.1.1 Cash A firm should maintain as little cash as possible, because cash is a nonproductive asset. It earns no

More information

What is a Balance Sheet?

What is a Balance Sheet? What is a Balance Sheet? A Balance Sheet is a financial statement which shows the ASSETS, LIABILITIES and CAPITAL of a business on a particular date. Assets Are Are items owned by by the the business or

More information

Cashflow Management. What is cashflow

Cashflow Management. What is cashflow Cashflow Management This Fact File Information Sheet looks at the key elements of cashflow, and how effective cashflow management will help protect the financial security of a business. It outlines the

More information

Article - Working Capital Management By Bernard Vallely FCCA MBA Examiner Professional 1 Managerial Finance & Professional 2 Financial Management

Article - Working Capital Management By Bernard Vallely FCCA MBA Examiner Professional 1 Managerial Finance & Professional 2 Financial Management Article - Working Capital Management By Bernard Vallely FCCA MBA Examiner Professional 1 Managerial Finance & Professional 2 Financial Management Working Capital An organisation s working capital refers

More information

INVESTING IN MORTGAGE FUNDS?

INVESTING IN MORTGAGE FUNDS? INVESTING IN MORTGAGE FUNDS? Independent guide for investors about unlisted mortgage funds Mortgage funds can also be called mortgage trusts or mortgage schemes. About ASIC The Australian Securities and

More information

Planning your cash flow

Planning your cash flow 5 Planning your cash flow PROFITS ARE NOT CASH 80 OPERATING CYCLE 81 CASH FLOW BUDGETING 82 TRADE DEBTORS 87 TRADING STOCK 89 OVERCOMING CASH FLOW PROBLEMS 91 MINIMUM CASH RESERVE 92 If the cash flowing

More information

Section 3 Financial and stock market ratios

Section 3 Financial and stock market ratios Section 3 Financial and stock market ratios Introduction 41 Ratio calculation 42 Financial status ratios 43 Stock market ratios 45 Debt: short-term or long-term? 47 Summary 48 Problems 49 INTRODUCTION

More information

Financial Terms & Calculations

Financial Terms & Calculations Financial Terms & Calculations So much about business and its management requires knowledge and information as to financial measurements. Unfortunately these key terms and ratios are often misunderstood

More information

Guide to cash flow management

Guide to cash flow management Guide to cash flow management Cash flow management What is cash flow management? For a business to be successful, good cash flow management is crucial. Cash flow is the primary indicator of a business

More information

ABOUT FINANCIAL RATIO ANALYSIS

ABOUT FINANCIAL RATIO ANALYSIS ABOUT FINANCIAL RATIO ANALYSIS Over the years, a great many financial analysis techniques have developed. They illustrate the relationship between values drawn from the balance sheet and income statement

More information

Management of Working Capital

Management of Working Capital International Journal of Computer Science & Management Studies, Vol. 13, Issue 03, May 2013 Management of Working Capital Arti Rani Assistant Professor Kanya Mahavidhyalya, Kharkhoda, Sonepat, Haryana

More information

7 Management of Working Capital

7 Management of Working Capital 7 Management of Working Capital BASIC CONCEPTS AND FORMULAE 1. Working Capital Management Working Capital Management involves managing the balance between firm s shortterm assets and its short-term liabilities.

More information

Incisive Business Guide to Factoring

Incisive Business Guide to Factoring Incisive Guide to Factoring Factoring Guide Summary This guide from Incisive outlines the features and benefits for your business from using factoring and invoice discounting services. Factoring is commonly

More information

Understanding Financial Statements. For Your Business

Understanding Financial Statements. For Your Business Understanding Financial Statements For Your Business Disclaimer The information provided is for informational purposes only, does not constitute legal advice or create an attorney-client relationship,

More information

INTEREST FREE NON REPAYABLE BUSINESS FUNDING. Charles Brooks Comprehensive BusinessManagement Ltd www.cbmgroup.co.uk

INTEREST FREE NON REPAYABLE BUSINESS FUNDING. Charles Brooks Comprehensive BusinessManagement Ltd www.cbmgroup.co.uk INTEREST FREE NON REPAYABLE BUSINESS FUNDING Charles Brooks Comprehensive BusinessManagement Ltd www.cbmgroup.co.uk 1 INTRODUCTION If you ve ever been involved in a start up venture you can probably remember

More information

Part 9. The Basics of Corporate Finance

Part 9. The Basics of Corporate Finance Part 9. The Basics of Corporate Finance The essence of business is to raise money from investors to fund projects that will return more money to the investors. To do this, there are three financial questions

More information

Bonds are IOUs. Just like shares you can buy bonds on the world s stock exchanges.

Bonds are IOUs. Just like shares you can buy bonds on the world s stock exchanges. Investing in bonds Despite their names, ShareScope and SharePad are not just all about shares. They can help you with other investments as well. In this article I m going to tell you how you can use the

More information

Selecting sources of finance for business

Selecting sources of finance for business Selecting sources of finance for business by Steve Jay 08 Sep 2003 This article considers the practical issues facing a business when selecting appropriate sources of finance. It does not consider the

More information

Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability

Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability A) Liquidity Ratio : - Ratio Analysis 1) Current ratio = Current asset Current Liability 2) Quick ratio or Acid Test ratio = Quick Asset Quick liability Quick Asset = Current Asset Stock Quick Liability

More information

CHAPTER 27 PRINCIPLES OF WORKING CAPITAL MANAGEMENT

CHAPTER 27 PRINCIPLES OF WORKING CAPITAL MANAGEMENT CHAPTER 27 PRINCIPLES OF WORKING CAPITAL MANAGEMENT Q.1 Explain the concept of working capital. Are gross and net concepts of working capital exclusive? Discuss. A.1 Working capital signifies money required

More information

Putting a business idea into practice

Putting a business idea into practice Putting a business idea into practice Objectives when starting up What is an objective? An objective is what the business is trying to achieve eg make profit Why do entrepreneurs start a business? There

More information

Construction Economics & Finance. Module 6. Lecture-1

Construction Economics & Finance. Module 6. Lecture-1 Construction Economics & Finance Module 6 Lecture-1 Financial management: Financial management involves planning, allocation and control of financial resources of a company. Financial management is essential

More information

performance of a company?

performance of a company? How to deal with questions on assessing the performance of a company? (Relevant to ATE Paper 7 Advanced Accounting) Dr. M H Ho This article provides guidance for candidates in dealing with examination

More information

Ratios and interpretation

Ratios and interpretation Unit Ratios and interpretation As we learnt in our earlier studies, accounting information is used to answer two key questions about a business: Is it making a profit? Are its assets sufficient to meet

More information

Paper FFM. Foundations in Financial Management FOUNDATIONS IN ACCOUNTANCY. Pilot Paper. The Association of Chartered Certified Accountants

Paper FFM. Foundations in Financial Management FOUNDATIONS IN ACCOUNTANCY. Pilot Paper. The Association of Chartered Certified Accountants FOUNDATIONS IN ACCOUNTANCY Foundations in Financial Management Pilot Paper Time allowed: 2 hours This paper is divided into two sections: Section A ALL TEN questions are compulsory and MUST be attempted

More information

Investing in mortgage schemes?

Investing in mortgage schemes? Investing in mortgage schemes? Independent guide for investors about unlisted mortgage schemes This guide is for you, whether you re an experienced investor or just starting out. Key tips from ASIC about

More information

It is concerned with decisions relating to current assets and current liabilities

It is concerned with decisions relating to current assets and current liabilities It is concerned with decisions relating to current assets and current liabilities Best Buy Co, NA s largest consumer electronics retailer, has performed extremely well over the past decade. Its stock sold

More information

Sources of finance (Or where can we get money from?)

Sources of finance (Or where can we get money from?) Sources of finance (Or where can we get money from?) Why do we need finance? 1. Setting up a business 2. Need to finance our day-to-day activities 3. Expansion 4. Research into new products 5. Special

More information

Corporate Credit Analysis. Arnold Ziegel Mountain Mentors Associates

Corporate Credit Analysis. Arnold Ziegel Mountain Mentors Associates Corporate Credit Analysis Arnold Ziegel Mountain Mentors Associates I. Introduction The Goals and Nature of Credit Analysis II. Capital Structure and the Suppliers of Capital January, 2008 2008 Arnold

More information

Fundamentals Level Skills Module, Paper F9

Fundamentals Level Skills Module, Paper F9 Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2008 Answers 1 (a) Calculation of weighted average cost of capital (WACC) Cost of equity Cost of equity using capital asset

More information

Consolidated balance sheet

Consolidated balance sheet Consolidated balance sheet Non current assets 31/12/2009 31/12/2008 (*) 01/01/2008 (*) Property, plant and equipment 1,352 1,350 1,144 Investment property 7 11 11 Fixed assets held under concessions 13,089

More information

Using Accounts to Interpret Performance

Using Accounts to Interpret Performance Using s to Interpret Performance ing information is used by stakeholders to judge the performance and efficiency of a business Different stakeholders will look for different things: STAKEHOLDER Shareholders

More information

Managing Cash Flow: Practical ways to Improving Cash Flow & Optimise Funding

Managing Cash Flow: Practical ways to Improving Cash Flow & Optimise Funding Managing Cash Flow: Practical ways to Improving Cash Flow & Optimise Funding A Practical Guide to understanding Effective Financial Management Module 6 Brendan Binchy CEO ROCG Europe W: www.europe.rocg.com

More information

INTERNATIONAL ACCOUNTING STANDARDS. CIE Guidance for teachers of. 7110 Principles of Accounts and. 0452 Accounting

INTERNATIONAL ACCOUNTING STANDARDS. CIE Guidance for teachers of. 7110 Principles of Accounts and. 0452 Accounting www.xtremepapers.com INTERNATIONAL ACCOUNTING STANDARDS CIE Guidance for teachers of 7110 Principles of Accounts and 0452 Accounting 1 CONTENTS Introduction...3 Use of this document... 3 Users of financial

More information

7.1. What is a director s loan account?

7.1. What is a director s loan account? 7. Directors loan accounts 7.1. What is a director s loan account? A director s loan account (DLA) (also known as a director s current account) is a notional balance between a company and its directors.

More information

Analyzing the Statement of Cash Flows

Analyzing the Statement of Cash Flows NACM Central Region Credit Conference 2012 Analyzing the Statement of Cash Flows John A. Jaeger, CCE Manager Credit & Accounts Receivable Follett Higher Education Group 1 1 Analyzing the Statement of Cash

More information

IGCSE Business Studies revision notes Finance Neil.elrick@tes.tp.edu.tw

IGCSE Business Studies revision notes Finance Neil.elrick@tes.tp.edu.tw IGCSE FINANCE REVISION NOTES Table of contents Table of contents... 2 SOURCES OF FINANCE... 3 CASH FLOW... 5 HOW TO CALCULATE THE CASH BALANCE... 5 HOW TO WORK OUT THE CASH AVAILABLE TO THE BUSINESS...

More information

Management of Working Capital

Management of Working Capital 7 Management of Working Capital UNIT I : MEANING, CONCEPT AND POLICIES OF WORKING CAPITAL Learning Objectives After studying this chapter you will be able to: Discuss in detail about working capital management,

More information

Accounts of the sole trader

Accounts of the sole trader Unit 1 Accounts of the sole trader This unit consists of one section only: Section 1: Final accounts Section 1 Final accounts By the end of this section you should be able to: explain the position of a

More information

Managing Cash Flow. A guide to help you broaden your understanding of how to manage cash flow in a small business

Managing Cash Flow. A guide to help you broaden your understanding of how to manage cash flow in a small business Managing Cash Flow A guide to help you broaden your understanding of how to manage cash flow in a small business This guide looks at the key elements of cash flow and working capital and how its management

More information

K.4 Using Credit Wisely After Bankruptcy

K.4 Using Credit Wisely After Bankruptcy Appx. K.4 K.4 Using Credit Wisely After Bankruptcy Beware of Credit Offers Aimed at Recent Bankruptcy Filers Disguised Reaffirmation Agreement Carefully read any credit card or other credit offer from

More information

Managing Cash Flow & Accessing Finance

Managing Cash Flow & Accessing Finance Managing Cash Flow & Accessing Finance A Presentation by Clive Lewis, Head of Enterprise, Institute of Chartered Accountants in England & Wales (ICAEW) Managing Cash Flow & Accessing Finance Presentation

More information

CHAPTER 17 Short-Term Financing

CHAPTER 17 Short-Term Financing 17-1 17-2 CHAPTER 17 Short-Term Financing Working capital financing policies Accounts payable (trade credit) Commercial paper Short-term bank loans Secured short-term credit Working Capital Financing Policies

More information

Double-Entry Bookkeeping: Assets and Liabilities

Double-Entry Bookkeeping: Assets and Liabilities Double-Entry Bookkeeping: Assets and Liabilities The purpose of this chapter is to introduce the fundamentals of double-entry bookkeeping and its role in accounting for business. The objectives of accounting

More information

It is concerned with decisions relating to current assets and current liabilities

It is concerned with decisions relating to current assets and current liabilities It is concerned with decisions relating to current assets and current liabilities Best Buy Co, NA s largest consumer electronics retailer, has performed extremely well over the past decade. Its stock sold

More information

7 Management of Working Capital

7 Management of Working Capital 7 Management of Working Capital UNIT I : MEANING, CONCEPT AND POLICIES OF WORKING CAPITAL Learning Objectives After studying this chapter you will be able to: Discuss in detail about working capital management,

More information

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated?

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

More information

Business expenses are a common example of a transaction which will show up in a DLA.

Business expenses are a common example of a transaction which will show up in a DLA. .1. INTRODUCTION (DLA) simply describes the situation where either the company owes a director money or vice versa. Typically, a DLA is first created shortly before a company first starts to trade where

More information

Financial Statement Ratio Analysis

Financial Statement Ratio Analysis Management Accounting 319 Financial Statement Ratio Analysis Financial statements as prepared by the accountant are documents containing much valuable information. Some of the information requires little

More information

Analyzing the Statement of Cash Flows

Analyzing the Statement of Cash Flows Analyzing the Statement of Cash Flows Operating Activities NACM Upstate New York Credit Conference 2015 By Ron Sereika, CCE,CEW NACM 1 Objectives of this Educational Session u Show how the statement of

More information

ACTIVITY 8.1 A MARGINAL PLAY

ACTIVITY 8.1 A MARGINAL PLAY LESSON 8 BUYING ON MARGIN AND SELLING SHORT ACTIVITY 8.1 A MARGINAL PLAY Stockbroker Luke, Katie, and Jeremy are sitting around a desk near a sign labeled Brokerage Office. The Moderator is standing in

More information

5.2 BUDGETING; CASH FLOW FORECASTS. Introduction To Budgets And Cash Flow Forecasts. Cash Flow Forecasts. Budget And Cash Flow Exercises

5.2 BUDGETING; CASH FLOW FORECASTS. Introduction To Budgets And Cash Flow Forecasts. Cash Flow Forecasts. Budget And Cash Flow Exercises 52 FUNDING 5 BUDGETING; CASH FLOW FORECASTS Introduction To Budgets And Cash Flow Forecasts Cash Flow Forecasts Budget And Cash Flow Exercises Cash Flow Exercises P 168 INTRODUCTION TO BUDGETS AND CASH

More information

M. Com (1st Semester) Examination, 2013 Paper Code: AS-2368. * (Prepared by: Harish Khandelwal, Assistant Professor, Department of Commerce, GGV)

M. Com (1st Semester) Examination, 2013 Paper Code: AS-2368. * (Prepared by: Harish Khandelwal, Assistant Professor, Department of Commerce, GGV) Model Answer/suggested solution Business Finance M. Com (1st Semester) Examination, 2013 Paper Code: AS-2368 * (Prepared by: Harish Khandelwal, Assistant Professor, Department of Commerce, GGV) Note: These

More information

December 2013 exam. (4CW) SME cash and working capital. Instructions to students. reading time.

December 2013 exam. (4CW) SME cash and working capital. Instructions to students. reading time. 1 December 2013 exam (4CW) SME cash and working capital Instructions to students 1. Time allowed is 3 hours and 10 minutes, which includes 10 minutes reading time. 2. This is a closed book exam. 3. Use

More information

Preparing Financial Statements

Preparing Financial Statements Preparing Financial Statements Understanding financial statements is essential to the success of a small business. They can be used as a roadmap to steer you in the right direction and help you avoid costly

More information

CHAPTER 21. Working Capital Management

CHAPTER 21. Working Capital Management CHAPTER 21 Working Capital Management 1 Topics in Chapter Alternative working capital policies Cash, inventory, and A/R management Accounts payable management Short-term financing policies Bank debt and

More information

account statement a record of transactions in an account at a financial institution, usually provided each month

account statement a record of transactions in an account at a financial institution, usually provided each month GLOSSARY GLOSSARY Following are definitions for key words as they are used in the financial life skills resource. They may have different or additional meanings in other contexts. A account an arrangement

More information

For a balance sheet item, an asset increase is a Debit a liability increase is a Credit

For a balance sheet item, an asset increase is a Debit a liability increase is a Credit 1 CASH FLOW ANALYSIS 1.1 Introduction For a further discussion on cash flow, please refer to the guide to financial statements in the Learning Centre. The key to cashflow analysis is recognition of cashflow,

More information

Financial Ratio Cheatsheet MyAccountingCourse.com PDF

Financial Ratio Cheatsheet MyAccountingCourse.com PDF Financial Ratio Cheatsheet MyAccountingCourse.com PDF Table of contents Liquidity Ratios Solvency Ratios Efficiency Ratios Profitability Ratios Market Prospect Ratios Coverage Ratios CPA Exam Ratios to

More information

By Lee Perkins - Managing Director of the Small Business Division at Sage

By Lee Perkins - Managing Director of the Small Business Division at Sage Good Cash Flow Management Guide By Lee Perkins - Managing Director of the Small Business Division at Sage What is cash flow? As any small business owner or adviser will tell you, cash is king. It s a wellknown

More information

KEY GUIDE. Setting up a new business

KEY GUIDE. Setting up a new business KEY GUIDE Setting up a new business The business idea You have a business idea, but can you turn it into a viable enterprise? Is there a market for the goods you will produce or the services you will supply?

More information

Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased.

Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased. Accounts Payable are the total amounts your business owes its suppliers for goods and services purchased. Accounts Receivable are the total amounts customers owe your business for goods or services sold

More information

START YOUR OWN BUSINESS WORK BOOK 5 FINANCE

START YOUR OWN BUSINESS WORK BOOK 5 FINANCE START YOUR OWN BUSINESS WORK BOOK 5 FINANCE FINANCE INTRODUCTION This work book seeks to answer the following financial questions to help you progress with your business idea: How can I develop a sales

More information

Evaluate Performance: Balance Sheet

Evaluate Performance: Balance Sheet Excerpted from FastTrac GrowthVenture Financial statements and reports must be read together to learn the whole financial story. For example, an Income Statement may report a large sale to a new customer,

More information

Manage your. The 8 best ways to ask for payments. Increase your sales through customer feedback. How to stay on top of your.

Manage your. The 8 best ways to ask for payments. Increase your sales through customer feedback. How to stay on top of your. Manage your cash flow Increase your sales through customer feedback The 8 best ways to ask for payments How to stay on top of your cash flow What is cash flow? As any small business owner or adviser will

More information

Lecture 13 Working Capital Management and Credit Issues

Lecture 13 Working Capital Management and Credit Issues Lecture 13 - Working Capital Management Gross working capital: Net working capital: BASIC DEFINITIONS Total current assets. Net operating working capital (NOWC): Operating CA Operating CL = Current assets

More information

Current liabilities and payroll

Current liabilities and payroll Chapter 12 Current liabilities and payroll Current liabilities are obligations that the business has to discharge within 12 months or its operating cycle if longer than one year. Obligations that are due

More information

Analyzing Cash Flows. April 2013

Analyzing Cash Flows. April 2013 Analyzing Cash Flows April 2013 Overview Introductions Importance of cash flow in underwriting decisions Key attributes to calculating cash flow Where to obtain information to calculate cash flows Considerations

More information

STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS

STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS C H A P T E R 1 0 STATEMENT OF CASH FLOWS AND WORKING CAPITAL ANALYSIS I N T R O D U C T I O N Historically, profit-oriented businesses have used the accrual basis of accounting in which the income statement,

More information

CIMA F3 Financial Strategy

CIMA F3 Financial Strategy CIMA F3 Financial Strategy Determining policy in respect of investment and financing of working Capital Working Capital Investment Investment in working capital is mainly a decision of risk and reward.

More information

Paper F9. Financial Management. Fundamentals Pilot Paper Skills module. The Association of Chartered Certified Accountants

Paper F9. Financial Management. Fundamentals Pilot Paper Skills module. The Association of Chartered Certified Accountants Fundamentals Pilot Paper Skills module Financial Management Time allowed Reading and planning: Writing: 15 minutes 3 hours ALL FOUR questions are compulsory and MUST be attempted. Do NOT open this paper

More information

Spotlight Quiz. Financial Risk

Spotlight Quiz. Financial Risk Spotlight Quiz Financial Risk 1 Risk and Reward One of the first things that we learn in finance is that there is a relationship between risk and reward; if you want to earn high rewards you need to accept

More information

Current Assets. Current Liabilities. Quick Assets or Liquid Assets. Current Liabilities. 1. Liquidity Ratios 1 Current Ratio Formula.

Current Assets. Current Liabilities. Quick Assets or Liquid Assets. Current Liabilities. 1. Liquidity Ratios 1 Current Ratio Formula. 1. Liquidity Ratios 1 Current Ratio Current Assets Current Liabilities This ratio shows short-term financial soundness of the business. Higher ratio means better capacity to meet its current obligation.

More information

how to prepare a cash flow statement

how to prepare a cash flow statement business builder 4 how to prepare a cash flow statement zions business resource center zions business resource center 2 how to prepare a cash flow statement A cash flow statement is important to your business

More information

Simple Interest. and Simple Discount

Simple Interest. and Simple Discount CHAPTER 1 Simple Interest and Simple Discount Learning Objectives Money is invested or borrowed in thousands of transactions every day. When an investment is cashed in or when borrowed money is repaid,

More information

Interpretation of Accounts.

Interpretation of Accounts. Interpretation of Accounts. The Interpretation of Accounts (or Ratios ) question has appeared as question 5 on the Leaving Cert exam every year to date. It is a vital question to master and one that can

More information

Interest is only paid on the amount of the overdraft drawn down.

Interest is only paid on the amount of the overdraft drawn down. Overdraft By enabling you to overdraw from your cheque account, an overdraft is particularly useful at times when income is temporarily insufficient to meet payments that are due. Overdrafts do not require

More information

For our curriculum in Grade 12 we are going to use ratios to analyse the information available in the Income statement and the Balance sheet.

For our curriculum in Grade 12 we are going to use ratios to analyse the information available in the Income statement and the Balance sheet. SUBJECT: ACCOUNTING GRADE 12 CHAPTER: COMPANIES LESSON: ANALYSIS AND INTERPRETATION-RATIOS LESSON OVERVIEW (KNOWLEDGE AREAS) LESSON 1. Introduction 2. Analysing of financial statements and its purpose

More information

Preparing a Successful Financial Plan

Preparing a Successful Financial Plan Topic 9 Preparing a Successful Financial Plan LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Describe the overview of accounting methods; 2. Prepare the three major financial statements

More information

Modeling Readiness Quiz

Modeling Readiness Quiz Modeling Readiness Quiz 1 Dear Students, Modeling Readiness Quiz Prepared by Prof. Dan Gode http://www.dangode.com Modeling is a useful course, but it also a rigorous and demanding elective. In the future,

More information

UNDERSTANDING WHERE YOU STAND. A Simple Guide to Your Company s Financial Statements

UNDERSTANDING WHERE YOU STAND. A Simple Guide to Your Company s Financial Statements UNDERSTANDING WHERE YOU STAND A Simple Guide to Your Company s Financial Statements Contents INTRODUCTION One statement cannot diagnose your company s financial health. Put several statements together

More information

Contribution 787 1,368 1,813 983. Taxable cash flow 682 1,253 1,688 858 Tax liabilities (205) (376) (506) (257)

Contribution 787 1,368 1,813 983. Taxable cash flow 682 1,253 1,688 858 Tax liabilities (205) (376) (506) (257) Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2012 Answers 1 (a) Calculation of net present value (NPV) As nominal after-tax cash flows are to be discounted, the nominal

More information