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You are here: Home / Archives for financial management training

April 11, 2014 by admin

Understanding Working Capital within Financial Management

Everybody is familiar with the concept of having
enough money financial managementin their bank to pay the bills at the end of the month. Working capital works on much the same principle.

The process of financial management i.e. Measuring and controlling your level of working capital, ensures your business can function from day to day and have enough current assets (money) to pay your current liabilities (bills).

How is working capital calculated?

Current Assets – Current Liabilities = Working Capital

This is also sometimes called “Net Working Capital”. The figure can be positive, negative, or zero.
Generally, a positive figure is seen as good. If the current assets exactly equal the liabilities the business has no reserves to meet unexpected events like repairs, stock problems, staff recruitment, etc .

Current Assets

Current assets include anything that is able to be converted into money within 12 months

Some examples of current assets are:

  • Cash or its equivalent – (overdrafts and credit cards fall under this heading)
  • Inventory / Stock / WIP – Most businesses expect their stock to sell within 12 months
  • Debtors – This is anybody who owes the business money, usually having purchased something on credit

Current Liabilities

These are the exact opposites of current assets. They include anything that has to be paid within 12
months and represent claims made against the business.

Some examples include:

  • Rents / Mortgages
  • Wages
  • Utility bills
  • Bank Interest on loans
  • Taxes

The Importance of working capital

A business may be profitable but is at risk of failing if the working capital is not managed correctly.
Many new businesses often fail due to working capital problems. Working Capital can be seen as the lifeblood of business, the oil that keeps the machine running.

The options open to businesses for increasing the level of working capital include:

Obtaining / increasing an overdraft

This is one of the most common methods of improving working capital and the least costly.
Most banks offer competitive overdraft rates and overdrafts are quick to set up and easy to manage.

Short-term Loan

A bank may well agree to a short-term loan (of less than one year duration) to provide temporary financing.
Note that the interest on the loan will become a new current liability.

Factoring

Factoring is a type of lending where an external company will advance the business money against the value of the outstanding invoices. The factoring company charges a service fee and interest on the value of the outstanding invoices. Factoring typically appeals to small businesses. An “in-house” solution is to reduce the time it takes customers who owe the business money (debtors) to settle their account. Both methods improve working capital,

Trade Creditors

Working capital is improved by lengthening the time creditors are paid. Rather than paying trade creditor invoices immediately, a business can improve working capital by waiting until they actually fall due. Also, it might be possible to renegotiate credit terms, such as moving from 30 days to 60 days for repayment, or to a “sale or return” policy.

Equity

For many small businesses, equity is a popular way of improving working capital. Entrepreneurs may invest their own funds, or those of family members or friends into the business. Some companies (like internet-start-ups in particular) will use venture capital funds. Once a business is established, a share- issue or reducing the share dividend are two common methods of improving working capital.

You can contact Progressive Training on Locall 1890 245435 or complete our online enquiry form for up to date information on the range of Financial management training courses we offer.

Filed Under: business training, Featured Articles, financial management training Tagged With: financial, management

May 27, 2013 by admin

Guide to explaining the Financial Balance Sheet

Many business owners can pick-up the basics of a financial management
profit and loss account without too much trouble.

For non-financial users, the balance sheet continues
to be a source of continued exasperation.

Elements of a Financial Balance Sheet

The profit and loss is a measure of how well a business
has performed over a period of time (say 1 year). A balance sheet on the other hand is a financial snapshot at a particular point in time.

Let’s examine a fictional balance sheet and discuss the various headings and definitions:

  1. The company name and current year end will be ba1sheet1
    found at the top of the balance sheet.
  2. Shows the current period figures. This can be anything from 1 day to 18 months.
  3. The previous periods figures are shown for ease of comparison
  4. Fixed assets are usually pieces of property, plant or equipment that are brought to help the business
    make money. They have an expected life > 2 years.
    Can include “Intangible Fixed Assets” like intellectual
    property rights or goodwill.
  5. Current assets are assets that remain on the balance sheet for < 1 year. They are ordered by how easily
    they are able to be converted to cash (or its equivalent)
  6. The balance of the bank account can appear in
    Current Assets or Current Liabilities if the account is
    overdrawn and using an overdraft facility.
  7. Current Liabilities detail any financial obligation (or debt)
    that will become due over the next 12 months.
  8. Net Current Assets illustrates the businesses ability to meet its current debts. A high figure shows a greater
    margin of safety whilst a negative figure will probably
    mean the business is in danger of failing.
  9. Long Term Liabilities are expected cash out-flows that
    will become due after 12 months. Examples usually include loans from banks or people.
  10. Net Assets is arrived at by subtracting total liabilities from total assets. For an insolvent business the figure will be negative there won’t be enough assets to meet the liabilities.
  11. Capital and Reserves illustrate how the business is funded.
    This usually shows the initial source of funding (capital)
    plus any retained profits carried over. Larger companies
    will have several different types of shared capital
    (preferred, ordinary, etc)

If you would like information on the range of courses Progressive Training
can offer you please click here for further details.

Filed Under: business training, Featured Articles, financial management training Tagged With: finance, training

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