Bus 650 week 3 assignment management of working capital case study georges trains

Topics: Corporate finance, Investment, Finance Pages: 5 (412 words) Published: May 7, 2015

Management of Working Capital
James Ward
Instructor: Leon Daniel
BUS 650 Managerial Finance
November 17, 2014

Management of Working Capital
A financial metric that ensures operating liquidity of a firm, business organization or any other entity including governmental entities is known as working capital. Working capital is the difference between the current assets and liabilities of an organization determining the amount of debt acquired to finance its assets. George had also borrowed loan from bank in order to finance the purchase of inventory for his shop. In addition, he also invests certain amount of personal equity to avoid bankruptcy. Pitfalls in George’s Capital budgeting Procedure:

The common pitfalls in George’s capital budgeting procedure are summarized as under: 1. Lack of adequate capital structure i.e. he has not properly manages the amount of debt and equity that would be required for financing his business. 2. Misunderstanding opportunity and sunk cost. George has incorrectly included sunk cost while calculating capital expenditure but has excluded the opportunity cost of foregoing high yield project. 3. He overstates net present value for his business by setting inappropriate discount rate i.e. too low discount rate. 4. He also made errors in estimating the cash flows of the business including both cash outflows and inflows. 5. His business failed to incorporate the recent economic trends in the market. Cash flow statement:

A cash flow system gives brief over view of the amount of cash going in and out of a specific company under three different types of activities i.e. operating, financing and investing activities. A simple cash flow statement for George’s business is as under: George Company

Cash flow statement
For the year ended December 2011
2011
$(000)
Cash flows from operating activities
Inflows:
Sale of goods27,828
GST collected from customers2,004
Interest receipts1,863
Others560
Outflows
Cost of goods sold(20,400)
Employee expense(2,059)
Supplies and services (1,867)
Other (202)
Net cash provided by operating activities$7,727
Cash flow from investing activities:
Inflows
Sale of property, plant and equipment 10
Outflows
Net payment for property, plant and equipment 483
Net cash used in investing activities$8,220
Cash flow from financing activities:
Loan from banks(17,178)
Personal equity 23,535
Net cash from financing activities$14,577
Net increase in cash held 1,084
Cash at the beginning of financial year 4,026
Cash at the end of reporting year$19,687

References
INTELECOM Intelligent Telecommunications, (n.d.) “Management of Working Capital Case Study: "George's Trains"” Retrieved from: http://searchcenter.intelecomonline.net/playClipDirect.aspx?id=4870EEC7664070BB9D6744FDA7325EE44F45E0E47862343D60FAA8E3325D1A83C46D5C6FAB3D01A758FA30144214BB3D

References: INTELECOM Intelligent Telecommunications, (n.d.) “Management of Working Capital Case Study: "George 's Trains"” Retrieved from: http://searchcenter.intelecomonline.net/playClipDirect.aspx?id=4870EEC7664070BB9D6744FDA7325EE44F45E0E47862343D60FAA8E3325D1A83C46D5C6FAB3D01A758FA30144214BB3D
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