George’s Train Working Capital

George’s Train Working Capital

BUS 650 Managerial Finance
Instructor: Leon Daniel

Submitted By: Telaine Nicholson

Date:  July 6, 2016

The assignment on this week is to concentrate on working capital practices.  Working capital is keeping the success of any business.  The task outlined was to review the video and comment on the working capital practices, including the methods of capital budgeting analysis techniques.  The instructions were to then determine if there were flaws in the capital budgeting practices that were currently in use.  Finally, the instruction was to complete a statement of cash flows for the operation.  

The company in the video started as a small business.  The owner was not originally an entrepreneur.  The owner is an advocate of controlled growth and the business started as a hobby.  The business was new and did not have a history but the individual owner had a history with his bank.  The capital for the initial investment came from the bank and the business was doing well that he purchased.  George had to make and unexpected purchase, which included the purchase of the building, which caused some, cuts in other areas.  

        In order to successfully execute this assignment, it is imperative to define working capital and the role that it performs in the operation of the business.  A business must have certain components to operate successfully and assets and current liabilities, which equates to the working capital are key.   Making sure that capital management executed correctly can create a great competitive advantage.  Bagyihan completed a  study aimed to provide pragmatic evidence in regards to the impact of working capital and determined that working capital and performance have a profound connection.   (Baghiyan, 2013)   In reading, it is disclosed that working capital is the difference between current assets and liabilities.  In the event that the assets exceed the liabilities, it will result in a positive working capital.  

        The video was quite informative for this assignment.  The video provides information on his strategy, in reviewing the video it shows that the owner provides incentives on various days for vendors.  In essence, he has created a working capital cycle.  A working capital cycle defines the time that it takes net liabilities and assets to convert to cash.  If the event last for an extended period, that means that, the capital is tied up.  The goal is to keep the cycle down to limited days  or extend the payables out for more the event that there is a positive working capital it results in maximized free cash flow.  Companies have to have cash to grow and this is done by decreasing the working capital cycle.  Men completed a study, which involved working capital cycles and attempted to determine the relationship between efficiency level of firms being traded in working capital management and their return on total assets. (Men, 2009)  The goal was to  clarify  the relationship between different indicators relating to efficiency in working capital management and their return on total assets through two models. The results showed there is a significance negative relationship between cash conversion cycle, net working capital level, current ratio, accounts receivable period, inventory period and return on total assets.  (Men, 2009)