In this scenario working capital is up to 550 now it

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Unformatted text preview: dget supplier to sell to you on the same terms you sell, net 30, instead of for cash. Now you have $100 that you owe to suppliers, which is called “Accounts Payable.” You also have $100 worth of widgets in inventory. This gives you the case in the following illustration, Buying on Credit, in which you are now poised to sell another widget and make more profit. CHAPTER 14: ABOUT BUSINESS NUMBERS 14.7 You have an extra $100 in assets (the widget in inventory) and an extra $100 as liabilities (Accounts Payable), so you are still in balance. Also, you still have no money. SELLING ON CREDIT BUYING ON CREDIT Sales and profits are the same, but now there’s no money. Business looked good, so you borrowed the money to buy another widget and continue. The Buying On Credit illustration shows the financial picture with sales to businesses on credit and purchase of inventory on credit as a short-term debt. Now the case is more like what you have with real business numbers, in which you have to manage your cash very carefully, and the amounts sitting in inventory and accounts receivable are significant. NUMBERS MOUNT UP You have the same sales and profits as in the earlier Three Widgets Sold example, but the balance sheet is more complex. WORKING CAPITAL In this illustration the business has enough working capital to survive the unexpected. More Realism: Working Capital Even in the case of the Numbers Mount Up illustration above, the example is completely unrealistic. • Where are the running expenses, such as rent, salaries, telephones, or even advertising those widgets? • How would they affect the cash situation? • How far would we get if we couldn’t pay the rent or the telephone bill while waiting for customers to pay us? HURDLE: THE BOOK 14.8 ON BUSINESS PLANNING • Furthermore, what supplier would give us a widget on credit when we have no history and no assets? • What bank would loan us money in this situation? Banks do loan against inventory and receivables, but only to a certain percentage of total value. What was missi...
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