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Edecel Applied Business Unit 11 Finance Task B

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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. ...read more.


A 1:1 ratio means the assets and liabilities are equal and surely it would be better to have a 2:1, however for firms such as Thomas Cook it is easy for them to raise finance and that's why it is acceptable. Another factor we can look at is the time period; these figures were taken from a balance sheet in October and there wouldn't have been a lot of current assets coming into the business as October is not their peak month. We have to keep in mind that Thomas Cook are a seasonal business and therefore figure's will be very different during periods of the year. In October it would be likely that Thomas Cook are spending money to securing next years holidays and they could also be borrowing money to do this. By taking this into consideration we can judge that the ratio may be acceptable and these figures are likely to be industry wide. We can also compare 2009 to 2008; the position from 2008 has gone down in 2009 and therefore it is a negative trend. This can be seen as bad for the businesses liquidity however by looking at other aspects of the balance sheet this could change the view. Trade and other payables is a lot higher in 2009 and this could indicate they are securing more holidays for the coming year. This looks like a good sign as they will be likely to secure more customers and therefore receive more profit. On the other hand we can look at it as it has created extra liability for Thomas Cook and we have to ask what if Thomas Cook cannot secure the extra customers; this would mean they would lose money. ...read more.


When analysing the financial position of Thomas Cook we always need to take into consideration what time of year the balance sheets are from. This can make a large change to the figures and outcomes of analysis especially because Thomas Cook is a seasonal business. During October Thomas Cook will be out of their peak stage therefore there balance sheets are likely to show some negatives. We can conclude that during this stage Thomas Cook may be waiting to book holidays for next year therefore they are saving up the cash in order to purchase them in the next few months. If we look at the balance sheets during June or July we would see a big difference as ratios would look better as there would be a greater income into the business. The management of working capital of Thomas Cook is satisfactory from looking at the balance sheets; the business is not booming, however this is due to the seasonal nature of the business. By taking this into account we can believe Thomas Cook has no major financial problems which will affect the business. I feel however they can make improvements in resolving there negative trends shown by the debtor's day's ratio. They could do this by managing the inflows coming in and also working out a more agreeable period of payback to their creditors. Overall I think that Thomas Cook management of working capital is fairly good with consideration to the time period. ?? ?? ?? ?? Caroline Noades 1 ...read more.

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