Edecel Applied Business Unit 11 Finance Task B

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Caroline Noades

Unit11- Task B

Report on working capital

Management at Thomas Cook plc

To Michelle Machon

From Caroline Noades

07/09/2010

Working Capital is the money used by the business to fund revenue expenditure; this is the day to day expenses. Day to day funds are needed in order to fund a business. The working capital would be used to buy resources such as raw materials, fuel, wages and fees etc. Working capital can also operating liquidity that is available to them.

Working capital has two components which are; things owed (current liabilities) and things owned (current assets). They are used when calculating the working capital: WK = CA – CL. If company’s assets are less then their liabilities then this results in a bad working capital because they will not have enough cash in the business to pay current liabilities; and therefore will owe more then they own. This is why working capital is very important in order to run an efficient business.

A business will have many current liabilities that they owe banks, people and other businesses. These can include things such as, bank overdrafts and bank loans which businesses would of borrowed from, these are common methods of “borrowing money” as it can be fairly easy for businesses to get loans and overdrafts. Credit Card debts are also common in businesses. A businesses liability’s also includes accruals and these are something that businesses will owe and these are all the extra things such as electricity bills. Hire purchase, dividends proposed and trade credit will also fall within a businesses current liabilities.

Businesses current assets are thing that they “have” or own. These can be general things such as stock, unfinished goods and raw materials for stock. These can be the hardest assets to turn into actual cash. The businesses money in the bank and investments are also current assets as well as any debtors the company has and prepayments which are deposits.

Working Capital Management & the Problems

When looking at working capital is important to analyse where cash is used in the day to day running of Thomas Cook; this can be known as a liquidity cycle. The start of Thomas Cook’s cycle would begin with them securing the hotel room and flights needed for their future customers, these would be on credit. They then sell these to the customers and take deposits/receivables. Thomas Cook need to ensure they get the correct balance between the hotels and flights they book and the correct amount of customers. This may be a big problem for their working capital if demands drops, and this will be likely in the current recession. To have a good liquidity Thomas Cook needs to ensure deposits quickly, because the longer it takes them to sell their holidays the more liquidity problems it will create.

The next step is for Thomas Cook to pay the suppliers; Thomas Cook will use the customer deposits to pay them however this will not cover the whole of the costs. Therefore Thomas Cook need an injection of cash and this is likely to be an overdraft. By having an overdraft will ease the flow of cash around the business and help liquidity. However banks may not want to give businesses an overdraft or loan if they are worried the company will not pay it back. This is more common recently with the recession as banks are becoming more careful with their money.

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By resorting to an overdraft does have its advantages, but overall in the long run it will increase costs for Thomas Cook as they will have to pay back extra interest fees. This can therefore reduce the profit for Thomas Cook which they will not want.

Banks may also think that the business is not doing well if it needs a loan and this could be a risk for the bank. If Thomas Cook cannot receive any injection of money then they will struggle to pay back suppliers on time and this can result in bad relationships and ...

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