Introduction to working capital

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Working capital is a vital element in any business so it's important that lenders understand it fully. This presentation is an introduction to the topic and explains what working capital is and why lenders should pay attention to it.

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Introduction to working capital

  1. 1. An introduction to working capital from businessbankingcoach.com in association with
  2. 2. To understand what working capital is, we first need a definition of what capital is
  3. 3. To understand what working capital is, we first need a definition of what capital is All businesses need capital to get started and to grow – some more than others
  4. 4. Keep this in mind; capital can come from two sources
  5. 5. Business owners can put their own cash into a business Business owner Cash
  6. 6. The business can retain some of the profit it makes each year to help fund its growth in the next financial period
  7. 7. Key point to remember; In our world, “capital” and “equity” are basically the same thing, just different words
  8. 8. Key point to remember; In our world, “capital” and “equity” are basically the same thing, just different words They both indicate that funds have been contributed to the business by the owners
  9. 9. The accounting equation is Assets = Equity plus Liabilities Any additional equity can be used to fund an increase in the assets or..... AssetsEquity
  10. 10. The accounting equation is Assets = Equity plus Liabilities Any additional equity can be used to reduce the liabilities (debts) or ..... Equity Liabilities
  11. 11. The accounting equation is Assets = Equity plus Liabilities Any additional equity can be used to both increase the assets by a smaller amount and reduce the liabilities (debts) by a smaller amount AssetsEquity Liabilities
  12. 12. If the equity is invested into assets, there are only two types of assets that it can go into
  13. 13. If the equity is invested into assets, there are only two types of assets that it can go into Non-current assets Land & buildings Vehicles Equipment Furniture
  14. 14. If the equity is invested into assets, there are only two types of assets that it can go into Non-current assets Land & buildings Vehicles Equipment Furniture Current assets Stock (inventory) Bank Trade debtors (accounts receivable)
  15. 15. When equity is invested in current assets, that becomes working capital So it’s capital that’s being used for generating cash flow and profit for the business
  16. 16. So that’s why working capital is important to lenders – it’s made up of the assets that create the business’ cash flow and, as we all know, it’s cash flow that repays debt
  17. 17. Let’s take a look at the working capital cycle – it indicates the speed and strength of the business’ cash flow
  18. 18. Stock (inventory) 2 Sales (Turnover) 3 Trade Debtors (Accounts receivable) 4 Cash 1 Operating expenses Creditors (suppliers) get paid Suppliers give credit
  19. 19. Beginning with cash at step 1
  20. 20. Stock is bought at step 2 but there is also an option to obtain it from suppliers using trade credit terms instead of using cash Beginning with cash at step 1
  21. 21. Stock is bought at step 2 but there is also an option to obtain it from suppliers using trade credit terms instead of using cash The stock is sold to customers at step 3 but on credit terms – they become trade debtors Beginning with cash at step 1
  22. 22. Stock is bought at step 2 but there is also an option to obtain it from suppliers using trade credit terms instead of using cash The stock is sold to customers at step 3 but on credit terms – they become trade debtors Trade debtors pay at step 4 as the cash returns to the business Beginning with cash at step 1
  23. 23. Stock is bought at step 2 but there is also an option to obtain it from suppliers using trade credit terms instead of using cash The stock is sold to customers at step 3 but on credit terms – they become trade debtors Trade debtors pay at step 4 as the cash returns to the business With the cash, business can pay operating expenses and trade creditors (suppliers) and then buy more stock to start the cycle over Beginning with cash at step 1
  24. 24. The big challenge for the business is to keep that cycle turning as quickly as possible to make sure that there is cash available to make payments for operating expenses and trade creditors
  25. 25. We do hope that you enjoyed this presentation. For more commercial and business banking content, please visit our website at www.businessbankingcoach.com where you can subscribe to our blog, listen to our podcasts or view and download our other Slideshare presentations. If you have any questions about this presentation or any of our other content, please send us an email at support@businessbankingcoach.com

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