Transcript BRC week 1Lesson 1 5007 Financial Control

Week- 1 Lesson 1 Session 1
Financial Control
4-Apr-16
Diploma in Management & Leadership
Level 5
By
Anjum Sattar
Email [email protected]
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Water Only
Aim (s)
• Introduction to working capital Management
• Explanation of ratios analysis
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Aims and Objectives.
Objective(s )
Learner will be able to….
• Define what is meant by working capital management.
• Explain types of ratios
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Background Knowledge
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• What do we know about Financial control
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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)
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.
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• 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.
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Working Capital
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Working Capital Formula
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• 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
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Current Assets and Current Liabilities
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• Two types of ratio under working capital, Liquidity ratios,
operating cycle ratios.
• Liquidity ratios
• Current ratio=
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Working Capital Ratios
Current assts/ current liabilities
• Quick ratio( acid test)=
Current assets-inventory/current
liabilities
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Statements of Financial Position
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Income statements for year 30 June
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Liquid ratios for 2010
74/46 = 1.6
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• Current ratio:
The Quick ( or acid test ratio):
72-42 /46 = 0.7
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Activity 1
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• Calculate current and quick ratio for year 2011. Through using
cheat sheet.
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• 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
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Operating cycle ratio’s
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Activity 2
By using cheat sheet of year 2010 calculate
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Account receivable turnover in days
Inventory turnover in days
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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
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Operating cycle
ratios
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Working capital
4Apr16
www.opentuition.com
www.accaglobal.com
CMI website
Youtube.com / F9 ACCA
Wikispaces.com / bradrc
www.cima.com
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Useful resource to enhance understanding in Working
capital management
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• 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 .
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Reference books
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Summary . Q & A
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• Working capital
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Next Session.
• Remaining ratios analysis / project appraisal
Tuesday 07/08/2012
09:30 – 1230
4-Apr-16
In Next Session we are going to Learn ……
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