Purchasing and Financing 2024

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Changes in working capital will impact a business’ cash flow. When working capital increases, the effect on cash flow is negative. This is often caused by the liquidation of inventory or the drawing of money from accounts that are due to be paid by the business. On the other hand, a decrease in working capital translates into less money to settle short-term debts. 3. THE CASH CYCLE Students can describe the cash cycle and are able to distinguish between Income vs. Cash Inflow and Expenses vs. Cash Outflow, as well as Financing vs. Investments. Sometimes referred to as a cash conversion cycle, the cash cycle has to do with the amount of time that passes between the purchase of raw materials for the creation of goods and services and the receipt of payment for those products. A key factor in the idea behind calculating the cash cycle is to understand the period of time when working capital is not available for use in other purchases. In a manufacturing process, the cash cycle begins with the acquisition of the materials needed to produce finished goods. The cycle continues through the time required to utilize the materials to create the products, package them, and deliver them to customers. Once the client is invoiced for the delivered goods, the last step of the cash cycle begins. A cash cycle is considered complete when the Accounts Receivable department receives and posts payment in full on the invoice covering the delivered goods. The duration of a cash cycle will vary, depending on several factors, including; o The amount of time that is required to create the product o The amount of time spent inspecting, packaging and shipping the finished product o The amount of time that it takes for the client to remit payment for the finished goods A short cash cycle is the ideal situation, as it allows the company to take advantage of the working capital sooner rather than later. Two ways to shorten a cash cycle are; o To refine the manufacturing and shipping procedures o To offer incentives to the customer to pay for the goods quickly The activities of a company relate to the cash flow as follows: o Goods are purchased and consequently there’s an outflow of money o While the goods are combined in the production process, there’s no inflow of money o The finished goods must now be sold and waiting for the customer to pay takes time so that the inflow of cash is delayed 28
It is important to note that Income and Expenses are not equal to Cash Inflow and Cash Outflow as illustrated by the following table. Income Expense Cash Inflow Cash Outflow Customer buys on credit X - - Customer pays cash X X Customer pays his instalment - - X Land is bought X - - When a company makes a profit there will be sufficient cash inflow in the long run, but there is a time lag between the outflow and inflow of money. Bridging that time gap is the task of financing. Financing is the supply of funds to pay for the investments of the enterprise. Funds may be needed for: Short-term liquidity such as: o trade credits o salaries and wages o cash payments o rental Long-term investment such as: o fixed assets o stocks o research an development Investment on the other hand is the application of funds to purchase and maintain the company’s assets, and may be necessary for: o The foundation of an enterprise o Reinvestments such as: o repairs and maintenance o replacement of depreciated capital goods o The rationalization and modernization of the company o The increase of the company’s operating capacity CLASS ASSIGNMENT: Please indicate which of the following is an investment or a form of finance: o bank overdraft o car o machinery o mortgage o share capital o stock o owner’s equity 29
Page 1 and 2: CATS Program Commercial Advancement
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Page 9 and 10: 5. STOCK CLASSIFICATION BASED ON TU
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Page 21 and 22: Cost (R) The decision whether to ma
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Page 41 and 42: 5. Lien A lien is the right to hold
Page 43 and 44: When evaluating the Growth of a Bus
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Page 53 and 54: INDIVIDUAL ASSIGNMENT: You intend t

Purchasing and Financing 2024

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