Working Capital
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Working Capital
Introduction to the Management of Working Capital
AS & A2 Business Studies
PowerPoint Presentations 2005
Introduction
• All businesses need cash to survive • Cash is needed to:
– Invest in fixed assets – Pay suppliers and employees – Fund overheads and other fixed costs – Pay tax due to the Government
• Nearly all businesses use much of their cash resources to finance investment in “working capital” • Managing working capital effectively is, therefore, a vital part of making sure the business has enough cash to continue
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What is Working Capital?
What is Working Capital?
Working capital is the cash needed to pay for the daytoday operation of the business
How is It Calculated?
Working capital is the difference between the current assets of a business and its current liabilities tutor2u™ www.tutor2u.net
Definition of Working Capital
Current Assets
Less
Assets of the business held in cash form (e.g. at the bank) or that that can quickly be turned into cash
Current Liabilities
Money owed by a business which will need to be paid in the next 12 months
tutor2u™
www.tutor2u.net
Definition of Working Capital
Stocks
Current Assets
Less
Debtors Cash Investments
Trade Creditors
Current Liabilities
Taxation Dividends Shortterm Loans
tutor2u™
www.tutor2u.net
Calculating Working Capital Example
Stocks Trade Debtors Current Assets Cash Prepayments Less £250,000 £500,000 £900,000 £125,000 £25,000 £250,000
Working Capital =
Trade Creditors £350,000 £100,000
Current Liabilities
Taxation Dividends Shortterm Loans
£650,000 £50,000 £150,000
tutor2u™
www.tutor2u.net
The Working Capital Cycle
• Not all businesses have the same need to invest in working capital • Much depends on
(1) The nature of the production process
Working Capital
Introduction to the Management of Working Capital
AS & A2 Business Studies
PowerPoint Presentations 2005
Introduction
• All businesses need cash to survive • Cash is needed to:
– Invest in fixed assets – Pay suppliers and employees – Fund overheads and other fixed costs – Pay tax due to the Government
• Nearly all businesses use much of their cash resources to finance investment in “working capital” • Managing working capital effectively is, therefore, a vital part of making sure the business has enough cash to continue
tutor2u™
www.tutor2u.net
What is Working Capital?
What is Working Capital?
Working capital is the cash needed to pay for the daytoday operation of the business
How is It Calculated?
Working capital is the difference between the current assets of a business and its current liabilities tutor2u™ www.tutor2u.net
Definition of Working Capital
Current Assets
Less
Assets of the business held in cash form (e.g. at the bank) or that that can quickly be turned into cash
Current Liabilities
Money owed by a business which will need to be paid in the next 12 months
tutor2u™
www.tutor2u.net
Definition of Working Capital
Stocks
Current Assets
Less
Debtors Cash Investments
Trade Creditors
Current Liabilities
Taxation Dividends Shortterm Loans
tutor2u™
www.tutor2u.net
Calculating Working Capital Example
Stocks Trade Debtors Current Assets Cash Prepayments Less £250,000 £500,000 £900,000 £125,000 £25,000 £250,000
Working Capital =
Trade Creditors £350,000 £100,000
Current Liabilities
Taxation Dividends Shortterm Loans
£650,000 £50,000 £150,000
tutor2u™
www.tutor2u.net
The Working Capital Cycle
• Not all businesses have the same need to invest in working capital • Much depends on
(1) The nature of the production process