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Accounts & Finance. Working Capital. Learning Objectives. Define working capital and explain the working capital cycle Prepare a cash flow forecast from given information Evaluate strategies for dealing with liquidity problems . Cash Flow Forecasts.

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accounts finance

Accounts & Finance

Working Capital

learning objectives
Learning Objectives
  • Define working capital and explain the working capital cycle
  • Prepare a cash flow forecast from given information
  • Evaluate strategies for dealing with liquidity problems
cash flow forecasts
Cash Flow Forecasts
  • A financial document that shows the expected movement of cash into and out of a business

Based on 3 key components

    • Cash Inflows (Any money coming into the business, sales revenue, bank loans) – Sometimes called receipts
    • Cash Outflows (payments, expenses, outgoings) – sometimes called payments
    • Net Cash Flow – Difference between cash inflows and cash outflows

2 essential components

    • Opening Balance – Amount of cash at the beginning of a trading period (Will be the same as the previous months closing balance) Sometimes the case study will provide you with the first months opening balance otherwise it is usually 0
    • Closing Balance – Amount of cash at the end of a trading period (Opening balance + net cash flow)
reasons for cash flow forecasts
Reasons for cash flow forecasts
  • Investors require a cash flow forecast in order to help them better assess the financial health of the business
  • Can help managers anticipate difficulties
  • Aids planning process
  • But remember…it is a forecast
cash flows
Cash Flows



Mistakes when preparing revenue and costs forecasts – inexperienced staff

Unexpected cost increases

Wrong assumptions

Inaccurate research

Demoralised workforce

  • By showing periods of negative cash flow, plans can be put into place to provide additional finance
  • If negative cash flow appears too great, plans can be put into place to reduce

There can be many limitations, at the end of the day, it’s a FORECAST

causes of cash flow problems
Causes of cash flow problems
  • One of the problems with having a long working capital cycle is that the business has to pay for expenses well in advance of receiving any cash inflows
  • If this problem is stretched out it can lead to liquidity problems
main causes of cash flow crises
Main causes of cash flow crises:
  • Overtrading – Expanding too quickly without the sufficient resources
  • Over borrowing – High cash outflow
  • Overstocking – Business is holding too much stock, stock costs money to buy, produce and store
  • Poor credit control – Too much credit given to customers
  • Unforeseen changes - PEST
  • Working individually and in pairs complete the following tasks, you should BOTH have a copy of your answers
  • It is important to firstly read the question properly
  • Secondly, extract the information required – remember examiners love to overload you with information, half of which you DON’T need
  • Finally, create your tables in pencil in case of any mistakes