BUSF_A01.qxd

Chapter 13 • Management of working capital

Make judicious use of bank overdraft and deposit accounts

Bank overdrafts should be avoided if possible, by scheduling payments and receipts

with a view to staying in credit. Use temporary cash excesses by putting the money

on deposit or investing in marketable securities. Where the cash surplus looks more

permanent, thought should be given to whether it should be used in real investment

or repaid to suppliers of long-term funds, thus saving the cost of servicing those funds.

Bank frequently

The business should encourage credit customers to pay by direct bank credit, thus lim-

iting the time before these receipts reach the bank to the minimum. Pay any cheques

received promptly into the bank. Businesses with large receipts of notes and coin (for

example, retailers) should consider banking several times each day, if only for security

reasons.

Time transactions to the best cash flow effect

There are several areas, particularly relating to tax payments, where with a little fore-

thought a payment can legitimately be delayed or a receipt hastened. For example,

corporation tax is based on the individual business’s accounting year, and the timing

of capital allowances is dependent on the date of acquisition of non-current assets. If

Cash budget for the three months ending 31 December:

October November December

££ £

Cash inflows:

Trade receivables Current month 29,400 34,300 44,100

Previous month 30,000 30,000 35,000

Total cash inflows (A) 59,400 64,300 79,100

Cash outflows:

Trade payables 20,000 40,000 40,000

Wages and salaries 15,000 17,000 13,000

Rent – – 10,000

Overheads 2,000 2,000 2,000

Plant acquired – 25,000 –

Total cash outflows (B) 37,000 84,000 65,000

Cash surplus/(deficit) for the month (A – B) 22,400 (19,700) 14,100

Cumulative cash balance 32,400 12,700 26,800

Notes to the solution

1 The above statement reflects the timing and amount of cash payments and receipts and

the resultant balance. It is not, and is not intended to be, an income statement (profit and

loss account). The profit or loss for these months will almost certainly be different from

the cash surplus or deficit.

2 Knowledge of the projected cumulative cash balance enables plans to be made to use the

surplus to effect; even if the most effective prospect is putting it on short-term deposit, it

is better than nothing.

Solution