Diploma in Management & Leadership Level 5 Week- 1 Lesson 1 Session 1 Financial Control

1. Diploma in Management & Leadership Level 5Week- 1 Lesson 1 Session 1Financial Control By AnjumSattar Email a.sattar@bradrc.co.uk Water Only

2. Aims and Objectives. Aim (s) • Introduction to working capital Management • Explanation of ratios analysis Objective(s ) Learner will be able to…. • Define what is meant by working capital management. • Explain types of ratios

3. Background Knowledge • What do we know about Financial control

4. 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) .

5. Working Capital • 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.

6. Working Capital Formula

7. Current Assets and Current Liabilities • 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

8. Working Capital Ratios • Two types of ratio under working capital, Liquidity ratios, operating cycle ratios. • Liquidity ratios • Current ratio= Current assts/ current liabilities • Quick ratio( acid test)= Current assets-inventory/current liabilities

9. Statements of Financial Position

10. Income statements for year 30 June

11. Liquid ratios for 2010 • Current ratio: 74/46 = 1.6 The Quick ( or acid test ratio): 72-42 /46 = 0.7

12. Activity 1 • Calculate current and quick ratio for year 2011. Through using cheat sheet.

13. Operating cycle ratio’s • 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

14. Activity 2 By using cheat sheet of year 2010 calculate • Account receivable turnover in days • Inventory turnover in days

16. Working capital

17. Useful resource to enhance understanding in Working capital management • www.opentuition.com • www.accaglobal.com • CMI website • Youtube.com / F9 ACCA • Wikispaces.com / bradrc • www.cima.com

18. Reference books • 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 .

19. Summary . Q & A • Working capital

20. Next Session. In Next Session we are going to Learn …… • Remaining ratios analysis / project appraisal Tuesday 07/08/2012 09:30 – 1230