Accounts and finance

Table of Contents

1. Topic pack - Accounts and finance - introduction
2. 3.1 Sources of finance - notes
3. 3.1 Sources of finance - questions
4. 3.2 Investment appraisal - notes
5. Investment appraisal
6. 3.2 Investment appraisal - questions
7. 3.3 Working capital - notes
   1. Working capital
   2. Working capital cycle
   3. Cash flow forecasts
   4. Profit and cash
   5. Cash flow forecasts
   6. An overtrading scenario
   7. Management of working capital
8. 3.3 Working capital - questions
9. 3.4 Budgeting - notes (HL only)
10. 3.4 Budgeting - questions
11. 3.5 Final accounts - notes
12. 3.5 Final accounts - questions
13. 3.5 Final accounts - simulations and activities
14. 3.6 Ratio analysis - notes
15. 3.6 Ratio analysis - questions
16. 3.6 Ratio analysis - simulations and activities
17. Printable version

Management of working capital

If cash flow is poor, how can it be improved?

Working capital management involves monitoring four important components of the working capital cycle:

• debtors
• creditors
• stock
• cash

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• Improving cash flow

'What if' analysis - contingency planning

As with all business tools the output is only as good as the quality of the input. Cash flow forecasts are exactly what they say - forecasts of future events. It is good planning to consider 'what if' scenarios which might affect cash flow. For instance:

• Sales revenue is lower than expected as fashions change
• Customers do not pay on time or there are larger bad debts than usual
• Raw materials, components and energy costs increase rapidly
• New competitors enter the market and existing competitors cut prices
• Interest rates increase
• Market research is inaccurate
• Motivation falls leading to lower output and higher production costs

The firm can work out the worst case scenario and look at the effect on its cash flow. Would this be sustainable? It can then put procedures and contingencies in place to deal with emergencies. For instance it may build contingencies into its budgets and/or negotiate overdrafts on good terms before they are required. Computer software makes it easier to complete 'what if' analysis using spreadsheets with variable timings and amounts.