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Week- 1 Lesson 1 Session 1 Financial Control 23-May-17 Diploma in Management & Leadership Level 5 By Anjum Sattar Email [email protected] 1 Water Only Aim (s) • Introduction to working capital Management • Explanation of ratios analysis 23-May-17 Aims and Objectives. Objective(s ) Learner will be able to…. • Define what is meant by working capital management. • Explain types of ratios 2 Background Knowledge 23-May-17 • What do we know about Financial control 3 Working Capital Management Working capital is the capital available for conducting the day –to-day operations of an organization; normally the excess of current assets over current liabilities. Working capital management is the management of all aspects of both current assets and current liabilities, to minimise the risk of insolvency while maximising the return on assets. Source :- F9(ACCA book of FTC) 23-May-17 . 4 • Working capital is how much in liquid assets that a company has on hand. Working capital is needed to pay for planned and unexpected expenses, meet the short-term obligations of the business, and to build the business. • A lack of working capital makes it hard to attract investors or to get business loans or obtain credit. 23-May-17 Working Capital 5 23-May-17 Working Capital Formula 6 • The net working capital of a business is its current assets less its current liabilities Current Assets include: Stocks of raw materials (inventory) Work-in-progress Finished goods Trade debtors ( Account receivables) Prepayments Cash balances Current Liabilities include: Trade creditors( account payables) Accruals Taxation payable Dividends payable Short term loans 23-May-17 Current Assets and Current Liabilities 7 • Two types of ratio under working capital, Liquidity ratios, operating cycle ratios. • Liquidity ratios • Current ratio= 23-May-17 Working Capital Ratios Current assts/ current liabilities • Quick ratio( acid test)= Current assets-inventory/current liabilities 8 23-May-17 Statements of Financial Position 9 23-May-17 Income statements for year 30 June 10 Liquid ratios for 2010 74/46 = 1.6 23-May-17 • Current ratio: The Quick ( or acid test ratio): 72-42 /46 = 0.7 11 • Calculate current and quick ratio for year 2011. Through using cheat sheet. 23-May-17 Activity 1 12 • The cash operating cycle is the length of time between the company’s outlay on raw materials, wages and other expenditures and the inflow of cash from the sales of goods. • The faster a firm can push items around the cycle the lower its investment in working capital will be • The periods used to determine the cash operating cycle are calculated by using a series of working capital ratios. • Account turnover ratio in days Account receivables / credit sales x 365 • 29000/ 209000 x365 = 50.6 days or 51 days. • Inventory turnover ratio in days • Average inventory/cost of good sold x 365 • (1/2( 37 +42) x365/ 157 = 92 days 13 Operating cycle ratio’s 23May17 Activity 2 By using cheat sheet of year 2010 calculate 14 Account receivable turnover in days Inventory turnover in days 23May17 Formula Year 2010 Account turnover ratio in days Account receivables / credit sales x 365 29000/ 209000 x365 = 50.6 days or 51 days. Inventory turnover ratio Average inventory/cost of good sold x 365 (1/2( 37 +42) x365/ 157 = 92 days Year 2011 23-May-17 Operating cycle ratios 15 16 Working capital 23May17 www.opentuition.com www.accaglobal.com CMI website Youtube.com / F9 ACCA Wikispaces.com / bradrc www.cima.com 23-May-17 Useful resource to enhance understanding in Working capital management 17 • Koontz Harold and Heinz Weihrich (1990) Essentials of Management fifth edition page 392,46,47,5 Published by McGraw-Hill , Inc . • Financial Control CMI Unit 5007 book • ACCA F9 paper book Financial Management FTC , BPP. • Financial Management 10th edition by Van Horn Published by McGraw-Hill , Inc . 23-May-17 Reference books 18 Summary . Q & A 23-May-17 • Working capital 19 Next Session. • Remaining ratios analysis / project appraisal Tuesday 07/08/2012 09:30 – 1230 23-May-17 In Next Session we are going to Learn …… 20