BA 101 Lecture Notes - Lecture 12: Fixed Asset, Retained Earnings, Cash Flow Statement
30 May 2018
School
Department
Course
Professor
Business 101 – Lecture 12 – Working Capital
Working Capital
• On the balance sheet, working capital shows up as:
o Current assets
o Current liabilities
• Current Assets – Current Liabilities = Working Capital
• How much assets are going to be turned into cash in a year
• How much liabilities are going to be paid off in a year
• If the working capital is positive, then there is extra money to spend
• Determines if the company can stay open or not
• Companies go bankrupt because they run out of cash not because they can’t make a profit
o Managing cash is extremely important
o New companies, people (jobs)
Operate – Using Investments
• If you turn a lot of cash into inventory, but less inventory back into cash (a lot of
inventory left over) you run out of cash
• It is in the warehouse waiting to be changed back into cash
Where Is Your Working Capital?
• Cash has been depleted from last year
o Is was eaten up by inventory – a result of poor sales forecasting
• Accounts payable increased
o Partially offset high inventory levels – it is like an interest free loan from vendors
Cash Flow Statement
• Shows a movement of cash in and out of an organization over a given period
• Shows how much cash is available for use during a given period
• Reconciles net profit back to cash
Investing
• Creating a company –
o Do you want to:
▪ Build a new factory?
▪ Increase capacity for a current product?
▪ Increase automation?
o All will increase plant and equipment
Document Summary
Business 101 lecture 12 working capital. If the working capital is positive, then there is extra money to spend: managing cash is extremely important, new companies, people (jobs) If you turn a lot of cash into inventory, but less inventory back into cash (a lot of inventory left over) you run out of cash. It is in the warehouse waiting to be changed back into cash. Cash flow statement: shows a movement of cash in and out of an organization over a given period, shows how much cash is available for use during a given period, reconciles net profit back to cash. Increase automation: all will increase plant and equipment. If you increase your capacity, it is a long-term investment long term or fixed asset and you should generate the funds from long term sources such as: retained earnings, issue bonds, issue stock.
