Today I am going to summarize chapter 3.3 Working Capital of unit 3
Every business needs cash in order to keep running. It is needed to pay regular costs for example wages. The amount of working capital shows the stock of money that is available for a business to pay for its immediate costs and expenditure (running costs) .A lack of working capital means that a firm has not enough money to finance its regular operations. Based on that information it is easy to guess that most business collapse due to a lack of working capital
So due to the information above it is important to know the following terms :
The term liquidity refers to how an asset can be turned into cash so highly liquid assets can be converted to cash easily without losing their value.
The term insolvency simply refers to the inability for a company to pay off its debts.
The term liquidation is the result of insolvency. A firm has to sell off all assets so that the money owed can be repaid.
Cash is a current asset and is the money that a business receives from the sale of goods and services.
The term debtor refers to organizations/ people that owe money to a business as businesses sometimes allow customers to buy something but pay later.
Stocks are for example raw materials, half-finished or finished goods that can be used in the manufacturing process.
It is also good to know about the term current liabilities that are considered liabilities of the business that are to be settled in cash within the fiscal year . This includes overdraft, creditors and tax.
A business has to manage their working capital very carefully as there is often a delay between paying costs of production and receiving the actual cash from the customer.
Every business needs cash in order to keep running. It is needed to pay regular costs for example wages. The amount of working capital shows the stock of money that is available for a business to pay for its immediate costs and expenditure (running costs) .A lack of working capital means that a firm has not enough money to finance its regular operations. Based on that information it is easy to guess that most business collapse due to a lack of working capital
So due to the information above it is important to know the following terms :
The term liquidity refers to how an asset can be turned into cash so highly liquid assets can be converted to cash easily without losing their value.
The term insolvency simply refers to the inability for a company to pay off its debts.
The term liquidation is the result of insolvency. A firm has to sell off all assets so that the money owed can be repaid.
Cash is a current asset and is the money that a business receives from the sale of goods and services.
The term debtor refers to organizations/ people that owe money to a business as businesses sometimes allow customers to buy something but pay later.
Stocks are for example raw materials, half-finished or finished goods that can be used in the manufacturing process.
It is also good to know about the term current liabilities that are considered liabilities of the business that are to be settled in cash within the fiscal year . This includes overdraft, creditors and tax.
A business has to manage their working capital very carefully as there is often a delay between paying costs of production and receiving the actual cash from the customer.
On the other hand side holding the many current assets in the business could be wasteful because it could be invested in expansion for the business for example in other words it should not have too much liquidity. Liquidity is measured in current ratio which compares the value of current assets with the value of current liabilities.
Cash flow forecasts show the expected movement of cash into and out of a business per time period and are based on cash inflow (inflow from sales revenue), Cash outflow (outgoings, expenses) and net cash flow which is the difference between cash inflows and cash outflows.
Reasons for making a cash flow forecast are that banks and other lenders require a cash flow forecast to evaluate financial health of the business seeking external finance, it helps managers to identify periods of potential cash shortage and also helps the planning process for a business.
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