After completing a mode train for his nephew sometime time shortly after World War I George Olieux began a small business of repairing model trains for individuals This later assisted in the growth of his business George Trains is now a Business that specializes in the sale repair and trading of model trains of all makes and models The organization is a family owned business that bases its business values on honesty fairness and integrity The company has a staff that is knowledgeable about model railroading alongside the various train models and other important Through this case study we shall examine George Train s business and working capital practices Working capital refers to the financial metric that ensures operating liquidity of a business organization firm and other governmental entities Working capital management is an important concept for business owners and managers of business to understand and today George Train’s working Capital shall be Examined and analyze to determine areas of needed improvement Working capital practices Business working capital is determined by dividing the current assets by current liabilities Jackson 2016 This information is highly important and enables owners and managers to be aware of short term efficiency as well as gain a full understanding of the business health as well as if the short time financial obligations can be met Jackson 2016 Working capital is the difference of an organizations current assets and liabilities determining the debt amount acquired in order to finance its assets The ratio gives an explanation if the company can be able to pay its short term debts through the current assets or not The company is sure of having problems of paying its loans short term if the current liabilities exceed the current assets John wanted to finance the inventory purchase for his shop he then borrowed loan from the bank Adding to this he also invests a given amount of personal equity in order to keep away from bankruptcy Potential pitfalls in George’s capital
The pitfalls that are common in George’s capital budgeting procedure are as follows 1 Lack of adequate capital structure He has lacked the proper methods of managing the amount of debt and equity that would be a necessity when financing his business The inadequate ratio affects both the profit of the business and also disturbs his repute in the market The major issue in his firm is brought about by the fact that he may not be able to pay his debts even in the future Anthes 2013 2 Incorrect opportunity and sunk cost George incorrectly included sunk cost in his calculation of the capital expenditure but has excluded the high yield project opportunity cost 3 Overstated NPV He sets inappropriate discount rate thus overstating the net present value for his business i e he sets discount rates that are too low According to the capital practice it is one of the wrong practices because it will insist him to accepting the wrong project due to wrong and low rates of discounts used by him 4 Cash flow errors He made some errors when estimating the business cash flows including both outflows and inflows Cash flows usually attract stakeholders and any cash flow errors harm the company s financial health 5 Did not incorporate current economic trends His business did not incorporate the recent economic trends in the market No firm can stand in the market without having to incorporate the current economic trends Anthes 2013 Cash flows A cash flow system gives an overview of the cash amount which goes in and out of a given company under activities of three different type s i e operating financing and investing activities A simple cash flow statement for George s business is as shown below George Company Cash flow statement
For the year ended December 2016 2016 000 Cash flows from operating activities Inflows Sale of goods 27 818 GST collected from customers 2 024 Interest receipts 1 833 Others 560 Outflows Cost of goods sold 20 400 Employee expense 2 029 Supplies and services 1 857 Other 222 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 Conclusion The main aim of this case study was to provide the owner of George s trains advice on his store working capital practices The advice provided included George train description of working capital process along with an explanation of different capital budgeting process methods Adding to this information there were discussions on the recommendation of George s trains Finally there was a provision of cash flow statement template to help George s trains to enable the owner in tracking how the companies are operating where they get the money from and where the money is used
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