Working is the readily available capital for the business. One can calculate it by subtracting the current liabilities from total current assets. This may involve ratio analysis and analyzing individual constituents of working capital. The importance of this analysis is to keep a close check on the liquidity of a business enterprise. Coyle may get finances from short term sources or long term sources to finance his working capital.
Short term loans. If Coyle decides to take a short term loan, it is crucial that he maintains proper track of the loan. He should look at the principle amount as well as the interest that he will be paying on a regular basis. This will enable him to settle the loan within the shortest time possible. Settling the debt will make him more credit worthy. It will increase his chances of getting another loan in the near future.
Goods and services purchased on credit terms. Managing working capital enables a business to know the value of goods and services it purchased on credit. This way, the business can settle all the debts at the right time. This avoids cases of rifts with creditors and helps the stakeholders to understand how the business is doing. Too many creditors may lead to problems in payment especially if the value of payables far exceeds the current assets within the business. The business may end up in too many debts. If unable to pay, this condition is dangerous as it can lead to bankruptcy.
Goods and services sold on credit. The business should also know the value of receivables. If a business is reckless in extending credit, it may experience problems regarding payment. This is especially so if the debtors refuse to pay. Consequently, this may lead to too many bad debts, and continuous loss making.
Goods and services paid for promptly after delivery. The business should ascertain the value of goods and services paid for on cash basis. These values are used to know the amount of cash in debts that have not been paid. The business should then make a follow up. This may take the form of communicating to debtors and claiming their money.
Managing cash flow in the business. Management of working capital means ascertaining the values of current assets and current liabilities. Cash forms current assets in the business. If the business manages working capital, it will then be easier to manage cash flows. The business will know the amount of money in circulation within the business. This may be used to measure business performance.
Reserving enough capital to finance business operations. If a business manages working capital, it understands the needs within the business. This is crucial since communicates how much money the business requires to finance certain operations. Current liabilities such as short term loans are then able to be met in time.
It also helps a business in to avoid bankruptcy. If a business manages its working capital, it is able to tell when debts are due. At the same time, it continues with its operation process as usual. This way, there is continuity in the business. If a business lowers production costs, while trying to maintain revenue from sales, this allows the company to have enough cash to finance operations pertaining to working capital. In addition, if a business puts short term loans to finance operations, it can generate enough profits to cater for long term loans. This is critical in the management of any business. Coyle’s is no exception. The business may fund its working capital using short term and long term finance.
Advantages of short term finance
Short term finance is cheaper. This is because calculation of interest covers a shorter period of time. In addition, long term finance attracts higher interest rates from lenders since their money is being kept for a longer period of time.
Short term finance is a flexible source of finance. The interest only covers a short period of time. For instance, a business that takes an overdraft gets quick pays it promptly. This is because the initial amount is not too high, neither is the interest. Short term finance is also unsecured. Long term finance requires a lot of modalities before the financier can accept to extend credit facilities.
Short term finance is easier to arrange compared to long term finance. This is because the business does not secure it upon its assets.
Advantages of long term finance
It is permanent. It runs for a full term. The company only pays interest at predetermined intervals.
Overdrafts may be demanded at any time. This may cause serious damage to the business, especially if at the time of request, the company is financing other operations.
There is no need to renew the finance continually. The business does not repay Shares hence it is a permanent source of finance.
Coyle may get finances from
- Business partner contributions
- Shareholder Equity in case the company becomes a limited company
- Contributions from family and friends
- Overdraft facilities
- Local and state economic development organizations
- Ploughing back Profits
I have used the monetary measurement convention. I have only used data that can be quantified. I have included financial figures in the trading profit and loss account and balance sheet, all in pounds. All financial statements in businesses should follow this trend. There are those factors that cannot be quantified. These include workers morale, quality of staff and management. I only record things that can be valued in monetary terms.
I have also regarded the Realization convention. I have recognized all the entries at the point of transaction. For instance, I recorded all purchases in the trading profit and loss, not regarding that the company sold some on credit. After transfer of ownership, goods and services should be valued and recorded immediately. This should apply in all other
In addition, I also followed the Separate Entity convention. This convention states that all personal matters regarding the owners of the business should be separated from transactions in the business. In my trading, profit and loss account and balance sheet, I only included transactions that relate to the business. Such include purchases, sales, depreciation and other expenses. The business cannot record any matters pertaining to Coyle himself are not recorded in the financial statements. This convention should be followed by any other business entity as long as the accountant is doing financial statements.
I also followed the materiality convention in my record. This convention holds that in the preparation of financial statements, accountants must maintain a high sense of judgment. This convention is extremely crucial for auditors too. The convention also maintains that accounting judgment must be appropriate. The judgment in question should only be significant or “material” to a person who uses the accounts. As the accountant who prepared the financial statements for Coyle, I made judgments regarding the figures that I recorded. I had to make sure that I have made appropriate entries.
I have assumed that the business is a going concern. As the accountant, I made appropriate entries, assuming that the business would not be closed for any reasons in the near future. This helped me in the valuation of assets and liabilities. I recorded the bank loan as a liability meaning that the company is a going concern. All accountants should assume the going concern concept in their preparation of financial statement. The accountant of any business should put all the entries into consideration based on this concept.
I have also considered the consistency concept. I have compared financial records in different years. For instance, I compared the opening and closing stock figures so that I could make appropriate judgment regarding their consideration in the profit and loss statements. The accounting figures are consistent year in year out. Every business accountants should make sure to record statements based on this concept, unless if the accounting concepts have changed. It is the role of management to inform the accountant in case of changes in the accounting policies of the company so that he can make relevant adjustments.
I also considered the prudence concept in my work. I only recorded profits after all factoring that all the business had completed all transactions regarding sales. I took care of the bad debts of the company, all the creditors and debtors. I did this after ascertaining that these costs could recur in future.
I considered the accruals as I prepared the books of accounts. I matched income with the respective expenses in the trading period ended 3oth September 2012. This is to make sure that the records presented in the books of accounts present a true and fair view. Every business should take care of this concept in accounting so as to prevent a case of confusing records. Financial statements are used for decision making by many companies. It is therefore crucial that the records presented present a true and fair view.