Presentation Transcript

1. 2/14 Group Warm-up Sequence of Events Today your business purchases $1,000 worth of stock (inventory) on credit from a supplier. You pay the supplier the full amount after 30 days. After another 30-days days, a customer purchases the $1,000 in stock for $1,400 on credit. The customer pays for the merchandise after 45 days. Draw an annotated timeline of the events described. Clearly indicate when your business is Paying Cash and Receiving Cash Comment on the cash flow situation of your business.
2. Cash Flow Timeline Customer Buys Product (on credit) Customer pays (Receive Cash) Purchase Stock (on credit) Pay for Stock (Pay Cash) 0 30 60 105 Accts. Pay. Period Receivables Period Inventory Period Working Capital Cycle Operating Cycle
3. Business Financing Continued Capital Investment Decisions Calculating Payback Period and Average Rate of Return (ARR) Analyzing the results of Payback & ARR Sources of Capital Managing Working Capital Working Capital & the Working Capital Cycle Forecasting cash flows Strategiesfor dealing with liquidity problems
4. What is Working Capital? Money Available to Fund Daily Running of Business - Current ASSET Current LIABILITY Liability = OWES legal obligations Current = require cash payment within 1-year. Examples; Overdrafts Creditors (Accounts Payable) Taxes Debts due Asset = OWNS; Current = convert to cash within 1-year Expected as part of business operation Examples Cash Stock (Inventory) Debtors (Receivables) Marketable Securities
5. What is Working Capital Management? Short-term Financial Management Managing the cash inflows & outflows that occur within a year What is a reasonable amount of cash to have on hand (or in bank)? How much should the business borrow in the short term? How much credit should be extended to customers?
6. Short-term Financing Concerns Cash flow patterns are Unsynchronized = pay for materials before product is sold Uncertain = future sales & costs can’t be predicted
7. Operating & Working Capital (Cash) Cycles Today you purchase $1,000 worth of inventory on credit. You pay the bill 30-days later, and, after 30 more days, someone buys the $1,000 in inventory for $1,400. Buyer pays 45-days after purchase.
8. Cash Flow Timeline Operating Cycle & Working Capital Cycle Together Customer Buys Product (on credit) Customer pays (Receive Cash) Purchase Stock (on credit) Pay for Stock (Pay Cash) 0 30 60 105 Accts. Pay. Period Receivables Period Inventory Period Working Capital Cycle Operating Cycle
9. Operating Cycle Time from Acquiring Inventory to Time Cash Collected from Customer Customer pays (Cash In) Purchase Inventory (on credit) Sell Product 0 60 105 60 days 45 days Inventory Period: Time to acquire & sell inventory Receivable Period Time to collect on the sale Operating Cycle Inventory Period + Receivable Period
10. Working Capital Cycle Time from Paying for Stock to Receiving Cash from Customer Customer pays (Cash In) Purchase Inventory (on credit) Pay for Inventory (Cash Out) 0 30 105 30 days 75 days Accts. Payable Period Time to pay for stock Working Capital Cycle Time from paying for stock & receiving cash from customer
11. How to Finance Gap Between Inflows & Outflows? Cash Flow Gap Customer pays (Cash In) Purchase Inventory (on credit) Pay for Inventory (Cash Out) Sell Product 0 30 60 105 Accts. Pay. Period Receivables Period Inventory Period Working Capital Cycle Operating Cycle
12. 2/17 Warm-up (Part-1) Define Working Capital Cycle. Explain why it is important for a business to analyze its working capital cycle.
13. Warm-up (Part 2)Identify factors impacting the Working Capital Cycle. Customer pays (Cash In) Purchase Inventory (on credit) Pay for Inventory (Cash Out) Sell Product 0 30 60 105 Accts. Pay. Period Receivables Period Inventory Period Working Capital Cycle Operating Cycle
14. Cash Flow Timeline Cash Flow Gap Customer pays (Cash In) Purchase Inventory (on credit) Pay for Inventory (Cash Out) Sell Product 0 30 60 105 Accts. Pay. Period Receivables Period Inventory Period Working Capital Cycle Operating Cycle
15. 2/16 Warm-up Today you purchase $500 worth of inventory on credit. You pay the bill 30-days later. A customer buys the inventory for $750 on credit 7 days after you purchased it. The customer pays their bill 14-days after their purchase. Draw this firm’s cash flow timeline. Identify each of the following; Stock (Inventory) Period Payable Period Receivables Period Working Capital Cycle Operating Cycle Comment on this business’s short-term financing needs.
16. Group Work Create Cash Flow Timeline for each of the business in 1998. Calculate / Identify the Operating and Working Capital Cycles. Compare each business to Dell, explain why they are envious of Dell. Make recommendations for each business.
17. Group Work Create Cash Flow Timeline for each business in 2000. Calculate / Identify the Operating & Working Capital Cycles. Compare each businesses Working Capital Cycles in 2000 vs. 1998. Identify reasons for changes. Identify strategies the business could have used.
18. Warm-up Identify the components of Apple’s working capital cycle that are mentioned in this article. Describe what Apple has done to the above mentioned components and what effect it has had on the business. Describe the business strategy that IBM & Apple share in common and why this leads to profitability.
19. Warm-up Explain the causes for an INCREASE in the working capital cycle using; Inventory (Stock) Period Receivables Period Payables Period Explain the causes for a DECREASEin the working capital cycle using; Inventory (Stock) Period Receivables Period Payables Period
20. Interpreting the Working Capital Cycle Increasing Decreasing Decreasing Inventory Period Sell Stock Quicker Decreasing Receivable Period Customers Pay Faster Increasing Payables Period Pay Creditors Later Increasing Inventory Period Selling Stock More Slowly Increasing Receivable Period Customers Paying More Slowly Decreasing Payables Period Paying Creditors Faster
21. Working Capital Cycle & Profitability Shorter Working Capital Cycle Leads to Greater Profitability Lower investment in Stock & Receivables Appropriate amount of stock Appropriate credit terms for customers Higher “turnover” Amount of revenue generated from investment in assets
22. Current Asset Investment Costs Carrying Costs Shortage Costs Investment in current assets is too low Run out of cash Run out of inventory Low receivables (not extending credit to customers) Too much = opportunity cost money could be invested elsewhere Rate of return on current assets is low $ could be invested elsewhere & earn a higher rate of return
23. Carrying Costs vs. Shortage Costs Cost ($) Current Asset Investment ($)
24. 2/27 Warm-up Nov-1: Business purchases $500 worth of inventory on credit from a supplier. Nov-8: Customer buys $500 worth of merchandise for $750 on credit. Dec-1: Business pays their supplier ($500). Nov-22: Customer pays their bill ($750). Identify how much profit this business generated? Identify when the following events are recorded in the financial records; Revenue Expense Cash Receipt Cash Payment
25. Recording Revenue & Expenses Realization Principle Matching Principle Revenue matched with costs associated with producing the revenue Not when payment made Revenue recorded at the time of sale Not when payment received
26. Profit vs. Cash Flow AccrualBasis = recording revenue & expenses as they are earned & incurred (not when they are paid) Accrued Revenue = Recording Revenue Before Receiving Cash Accrued Expense = Recording Expenses Before Paying Cash Deferred Revenue = Recording revenue after receiving cash Deferred Expense = Recording expense after paying cash
27. Accrued Revenue Products are sold for $5,000 on May 1, 2010 and cash is received on May 10, 2010. May 1, 2010 = Revenue Recorded May 10, 2010 = Cash Received
28. Accrued Expense Business receives a $1,000 bill for electricity usage on May 1, 2010 and cash is paid on May 10, 2010. May 1, 2010 = Expense Recorded May 10, 2010 = Cash Paid
29. Deferred Revenue On May 1, 2010, a business has a new rental agreement with a customer and receives $2,000 for 2 months rent. May 1, 2010 = Cash Received May 31, 2010 = Revenue Recorded ($1,000) June 30, 2010 = Revenue Recorded ($1,000)
30. Deferred Expense On May 1, 2010, a business pays $3,000 for 3-months of insurance coverage. May 1, 2010 = Cash Paid May 31, 2010 = Expense Recorded ($1,000) June 30, 2010 = Expense Recorded ($1,000) July 31, 2010 = Expense Recorded ($1,000)
31. Components of Cash Flow Forecast Cash Inflows (+) Operating Cash Flows (Sales/Revenue) Cash Sales Payments from Debtors (sales to customers on credit) Capital (Invested Funds or Borrowing) Cash Outflows (-) Paying bills, costs & expenses Net Cash Flow [Cash Inflows] – [Cash Outflows] Balances Opening Balance (previous period closing balance) Closing Balance (Opening Balance + Net Cash Flow)
32. Dealing With Cash Flow Problems Obtain Financing Improve Cash Flows Problem Identified Time to implement
33. Obtain Sources of Finance Short-term sources of liquidity Overdrafts Sale & leaseback Sell fixed assets Debt factoring Government assistance
34. Improving Cash Inflows Shorten receivables period Tighten credit control Cash payment only Improve or Enhance Marketing Pricing Product Promotion
35. Reducing Cash Outflows Lengthen Payables Period Improved credit terms Shorten Inventory Period Improve stock control Reduce Expenses New supplies (lower cost) Reduce expenses