35 years: Credit & banking
In the final video of the series on credit analysis, the example from the previous videos carries over. Nick explains the working capital cycle and how its funding can cause problems.
In the final video of the series on credit analysis, the example from the previous videos carries over. Nick explains the working capital cycle and how its funding can cause problems.
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11 mins 39 secs
This analyses the impact on the company accounts if it were to increase its sales and trading frequency in the future, along with the problems from over-trading and the outstanding debt that comes with this.
Key learning objectives:
Discuss the impact on the accounts for days 77 and 78
Explain how the statements would change if tax or interest were paid
Identify what causes the debt, and discuss whether is it sustainable
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Clearly the business is perfectly profitable.
We have assumed these both = 0. However, in reality:
Interest charged will be a reduction from P&L. If it is paid, it will be a reduction in cash, if it is not, it will be an increase in accruals. If tax is charged, it is a deduction from P&L. If it is paid, it is a reduction in cash, if not, it is an increase in accruals.
The first 75 days of sales no one pays you – it is on the 75-day terms, and thus, these rapidly increasing debtors have to be funded.
The overdraft looks like this:
We started with £100k cash, spent £20k on the van which leaves £80k. We paid out £5k a day from day 73-77 in operating costs meaning we are £295k overdrawn + the 16 days of stock at £50k each (£800k) = a total of £1,095,000 in overdraft.
No – we have ignored interest and tax both of which will reduce profits and eventually have to be paid in cash. Also, the casual assumption that the business will boringly have been able to replicate the trading pattern day in and day out is brave to say the least.
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