1. IB Business and Management
3.3 Working Capital

2. Learning Outcomes
Define Working Capital and explain the Working Capital Cycle
Prepare a cash-flow forecast from given information
Evaluate strategies for dealing with liquidity problems

3. What is Working Capital?
The funds available for day-to-day operations of an organisation
It is used as a measure of both a company's efficiency and its short-term financial health
A firm with insufficient working capital is said to have liquidity problems
Working Capital = Current Assets - Current Liabilities

4. Working Capital Questions…
What are the day-to-day running costs of a business likely to be?
What will happen if a business can’t afford to pay these running costs?
What is a ‘Current Asset’?
What is a ‘Current Liability’?

5. Current Assets
A current asset is an asset which can either be converted to cash or used to pay current liabilities within 12 months
What are these assets likely to be?
Current Assets = Cash + Stock + Debtors

6. Current Liabilities
Current liabilities are the liabilities (debts) of the business that are to be settled within the fiscal year
Who might a business owe money to?
Likely current Liabilities =
Overdrafts
Short term loans
Creditors
Unpaid Tax
Unpaid Dividends
Accrued utilities charges

7. So why is working capital so important?
Insufficient working capital is a bigger cause of business failure than a lack of profitability Are there any other benefits of having plenty of working capital available?

8. Benefits of good working capital management
Enhanced goodwill
Less reliance on borrowing (less interest to pay)
Easier to obtain finance
Ability to respond to opportunities
Ability to face crises

9. Purchase of Raw Materials
Working Capital Cycle
Purchase of Raw Materials
Production costs
Inventory
Sales
Debtors
Cash
How long might each of these stages last?
What would the problems be of a long working capital cycle?
How could businesses reduce the length of their working capital cycle
Which businesses are likely to have long working capital cycles?

10. Predicting the future……
Cash Flow Forecasting

11. What is Cash?
Cash includes all the money a business has in coins and notes
It also includes money which they have in the bank

12. What is Cash Flow?
Cash Flow is concerned with: The timings and amounts of cash inflows and cash outflows

13. Task – 2 minutes
You have 2 minutes to think about where a business might receive money These are called Cash Inflows/Receipts
You have 2 minutes to think about what a business might need to spend money on
These are called Cash Outflows/Payments
Write them on the board

14. Cash Inflows Cash Outflows Cash Sales Cash purchases Paying creditors
Pay Production Costs
Buy Equipment
Loan Repayments
Tax payments
Dividends
Loans
Owners Capital
Grants
Debtor payments
Rental Income
Interest

15. Cash Flow Vs Profit

16. Cash flow and profit Are NOT the same!!!!
Cash Flow Vs Profit
In the long term businesses should be aiming to make a profit…..
However in the short term having enough cash is more important.
Cash flow and profit Are NOT the same!!!!

17. Profit
Cash Flow
Profit = Revenue – Costs Revenues and costs are recorded at the time of the transaction
Net Cash Flow = Cash Inflows – Cash Outflows Inflows and outflows are recorded at the time the cash transfer occurs

18. Cash Inflows Cash Outflows
Imagine a business had the following inflows/outflows in April………………..
Cash Inflows
Cash Outflows
Cash Sales
Cash purchases
Paying creditors
Pay Production Costs
Buy Equipment
Loan Repayments
Tax payments
Dividends
Loans
Owners Capital
Grants
Debtor payments
Rental Income
Interest
Look at these cash flows……. Would each of these types of inflow/outflow be included in the profit calculation for April?

19. Task
Look at the following and decide whether they would immediately affect cash flow/profit or both…..

20. Receiving a bank loan
Cash Flow
Profit
Both

21. Making a cash sale
Cash Flow
Profit
Both

22. Making a credit sale
Cash Flow
Profit
Both

23. Purchasing stock with cash
Cash Flow
Profit
Both

24. Paying wages
Cash Flow
Profit
Both

25. Receiving a government grant
Cash Flow
Profit
Both

26. Buying stock on credit
Cash Flow
Profit
Both

27. The value of a car depreciates
Cash Flow
Profit
Both

28. A debtor settles his account for goods purchased last month
Cash Flow
Profit
Both

29. The business buys a new vehicle by cheque
Cash Flow
Profit
Both

30. Tax bill is paid to the government
Cash Flow
Profit
Both

31. A building is sold for more than was paid for it
Cash Flow
Profit
Both

32. Net Cash flow

33. Net Cash Flow?
NET CASH FLOW is the difference between the cash coming into and going out of the business and can be POSITIVE or NEGATIVE
Net Cash Flow = Cash Inflows – Cash Outflows

34. Positive Net Cash Flow
Negative Net Cash Flow

35. Cash flow forecasts
A cash flow forecast is a financial document that predicts what the firms inflows and outflows will be over a period of time
Why is it useful for a firm to produce a cash flow forecast?

36. Why do businesses need to forecast cash flow?
They may need to produce a cash flow forecast as part of a business plan
Allows the firm to spot any months when there will be a cash shortage and give them time to take action or plan for this
Provides targets for the firm….. If real cash flow is different from what is forecasted they need to investigate why
Can spot any times where there are cash surpluses and decide what to do with these

37. An Example Jan Feb Mar Apr May Jun Open Balance £150 -£50 £50 £450
£1450
£1250
Inflows
Sales
£1000
£1500
£1200
Grant
Total Inflow
£2200
Outflows
Wages
£500
Stocks
£400
£600
£900
Electric
£200
Total Outflows
£1100
£1400
Net Cash flow
-£200
£100
Closing Balance
£1850

38. Activity – Ben’s Burger Bar
Using the question sheet and the blank cash flow sheet attempt fill in the titles for inflows and outgoings on the table

40. Now try entering the information that you have been given into the cash flow forecast

42. Total up the Inflows for each month and enter into the Total Inflows cell
Total up the Outflows and enter into the Total Outflows cell

44. Now Work out the Net Cash flow for each month by subtracting the Total Outgoings from the Total Incomes.
Net Cash flow =Total Income – Total Outgoings

46. Finally- Now fill in the Closing Balance by adding the Net Cash flow to the Opening Balance.
The Closing Balance becomes the opening balance for the next month.

48. Fill in the missing figures
Jan
Feb
March
April
Opening Balance
10,000
19,200
21,300
22,800
Inflows
Sales
5,000
6,000
7,000
Bank Loan
8,000
Total Inflows
13,000
Outflows
Rent and Rates
1,000
Raw Materials
1,500
1,900
2,000
Wages
Utilities
300
Total Outflows
3,800
3,900
3,500
4,300
Net Cash Flow
9,200
2,100
2,700
Closing Balance
25,500 8 1 3 5 2 4 6 7 9 10

49. Now for some IB Questions
Warning! Pick a cash flow question with caution!! Cash flow questions can be time consuming Usually only 6 marks available to construct a whole cash flow forecast from scratch

50. Task – 10 mins
Complete the cash flow forecast for Rizzo Fashions

51. Cash Flow Problems (And how to fix them)
So…. What could cause a business to have cash flow problems?
Cash Flow Problems (And how to fix them)

52. Causes of cash flow problems
Overtrading
Poor Profitability
Overstocking
(too much inventory)
Poor credit control
Unforeseen changes
Seasonality
Lack of planning
Money tied up in fixed assets
Not keeping enough retained profit
How could each of these factors lead to cash flow problems?
What could be done to prevent these issues causing a problem?

53. Task - Pairs Evaluating solutions to cash flow problems
Each pair will be given some causes to focus on
Discuss some solutions and fill in the google doc
Share your solutions with the class

54. Improving Cash flow Reducing costs Increasing selling price
Increasing sales
Increasing retained profits
Renting rather than buying
Borrowing money- arrange an overdraft or loan
Delay paying bills as long as possible
tighten up on credit given
Debt Factoring
Reducing stock levels

55. Homework Task – 25 mins
Answer all parts of the NPF Question