Presentation on theme: "Working Capital Control"— Presentation transcript:
1 Working Capital Control What is it?Essentially net current assets (but strictly speaking should exclude cash)Why is it important?Cash tied up in day-to-day operationsThe business cannot continue without itIt has to be funded from somewhereIf business runs out of cash, it will fail
2 Why do we need to control it? Use cashflow forecast to work out how much cash we need to borrow/investTo keep working capital to a minimum (and hence free up cash for other purposes):keep stocks lowkeep debtors lowdelay payment to creditorsBUT if working capital too low (or negative), risk bankruptcyfail to meet liabilities as they fall due
5 Bank ReconciliationsYou can check the cash at bank (or bank overdraft) balance in the accounts by comparing it to the balance on your bank statement.The two figures are unlikely to agree exactly - this does not mean that the balance in the accounts is wrong.Acceptable differences are cheques that have not yet cleared (deposits and payments). Other differences should be adjusted.
6 Bank Rec. Example Balance per bank statement = £351.05 Balance per cash book (accounts) = £319.04Why are they different?3 cheques you have issued have not cleared1 deposit has not been clearedthe bank has made an error with the amount of another depositthese are all acceptable differences
7 Bank Reconciliation as at 30 Nov £ £Balance per bank statementLess: outstanding chequesAdd: outstanding depositLess: error on statementBalance per cash book
8 Daphne Ltd ExampleAcceptable differences are cheques outstanding (not yet presented) and deposits not yet credited (cleared).But we must adjust for investment income, bank charges and standing order as we should have entered these in the books (accounts).Nb. typo: statement date not 00
10 Ratio AnalysisRatios of accounting numbers are useful to analyse the position and performance of a business.It is important to compare ratios over time (trends), or to budgets, or to other businesses/industry averages. By themselves they are meaningless.
11 Profitability Ratios Gross Profit Ratio = Gross Profit 100% Sales Net Profit Ratio = Net Profit 100%ROCE = PBIT 100% Capital Employed
12 ROCE ROCE is very important. Can split ROCE as follows: ROCE = Net Profit Ratio Capital Turnover Ratioas long as you use PBIT in Net Profit RatioCapital Turnover Ratio = SalesCapital Employed
13 Liquidity (Working Capital) Ratios Use Stock Turnover Ratio to see whether the Current or the Quick Ratio is the most appropriate liquidity ratio to use.High/quick stock turnover - Current RatioLow/slow stock turnover - Quick RatioAlso look at Debtor and Creditor Days to determine changes in payment/collection periods (affect cash cycle of business).
14 Stock Turnover Ratio = Cost of Sales Inventory HeldORInventory Held 365 days (no. of days)Cost of Sales
15 Current Ratio = Current Assets . Current Liabilities Quick Ratio = Current Assets – Stockthe quick ratio is sometimes also called the ‘acid test’.
16 Debtor Days = Trade Debtors 365 days Total Credit Sales (how long it takes your customers to pay)Creditor Days = Trade Creditors 365 daysTotal Credit Purchases(how it takes you to pay your suppliers)if you don’t have purchases, use C.O.S.
17 Efficiency RatiosTell you how well you use your assets to generate income.Capital Turnover RatioFixed Assets Turnover Ratio =SalesFixed Assets Book Value
18 Gearing Ratios Debt to Equity = Long-Term Liabilities Capital + ReservesDebt to Capital Employed =Long-Term LiabilitiesCapital Employed
19 Investor Ratios Dividend Yield = Div Per Share 100% Market Price per ShareNote: You need market price to calculate this but it may not be available.Dividend Cover =Net Profit Before Ord DivsOrd Divs paid and proposed
20 Earnings per Share = Earnings Before Ord Divs No. of Ordinary Shares Issuedcompanies like Somerfield report this at bottom of the profit and loss accountPrice Earnings Ratio = Market Price per Share(PE Ratio) Earnings per Share
21 Writing Reports Title page Contents page Executive summary Terms of referenceIntroductionSeveral sections dealing with contentConclusionAppendices