After to be aware of short term efficiency,

Aftercompleting a mode train for his nephew sometime time shortly after World War I,George Olieux began a small business of repairing model trains for individuals.This later, assisted in the growth of his business. George Train’s is now a businessthat specializes in the sale, repair, and trading of model trains of all makes andmodels. The organization is a family owned business that bases its business valueson honesty, fairness, and integrity ().

The company has a staff that is knowledgeableabout model railroading alongside the various train models and other important.Through this case study we shall examine George Train’s business and working capitalpractices. Working capital refers to the financial metric that ensuresoperating liquidity of a business organization, firm and other governmentalentities. Working capital management is an important concept for businessowners and managers of business to understand, and today George Train’s workingcapital shall be examined, and analyze to determine areas of needed improvement.Workingcapital practices:Businessworking capital is determined by dividing the current assets by currentliabilities (Jackson, 2016). This information is highly important and enables ownersand managers to be aware of short term efficiency, as well as gain a full understandingof the business health as well as if the short time financial obligations canbe met (Jackson, 2016). Working capital is the difference of an organizationscurrent assets and liabilities determining the debt amount acquired in order tofinance its assets.

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The ratio gives an explanation if the company can be ableto pay its short-term debts through the current assets or not. The company issure of having problems of paying its loans (short term) if the currentliabilities exceed the current assets. John wanted to finance the inventorypurchase for his shop he then borrowed loan from the bank.

Adding to this, healso invests a given amount of personal equity in order to keep away frombankruptcy. Potentialpitfalls in George’s capitalThepitfalls that are common in George’s capital budgeting procedure are asfollows: 1)      Lack of adequate capital structureHehas lacked the proper methods of managing the amount of debt and equity thatwould be a necessity when financing his business. The inadequate ratio affectsboth the profit of the business and also disturbs his repute in the market. Themajor issue in his firm is brought about by the fact that he may not be able topay his debts even in the future (Anthes, 2013).     2). Incorrect opportunity and sunk costGeorgeincorrectly included sunk cost in his calculation of the capital expenditurebut has excluded the high yield project opportunity cost.

3).Overstated NPVHesets inappropriate discount rate thus overstating the net present value for hisbusiness i.e. he sets discount rates that are too low. According to the capitalpractice, it is one of the wrong practices because it will insist him toaccepting the wrong project due to wrong and low rates of discounts used byhim.4).Cash flow errorsHemade some errors when estimating the business cash flows including both outflowsand inflows. Cash flows usually attract stakeholders and any cash flow errorsharm the company’s financial health.

5).Did not incorporate current economic trendsHisbusiness did not incorporate the recent economic trends in the market. No firmcan stand in the market without having to incorporate the current economictrends (Anthes, 2013).CashflowsAcash flow system gives an overview of the cash amount which goes in and out ofa given company under activities of three different type’s i.e. operating,financing and investing activities.A simple cash flow statement for George’s business is asshown below:GeorgeCompanyCash flowstatementForthe year ended December 2016                                                                                                                                    2016                                                                                                                                    $(000)Cash flowsfrom operating activities                                                                       Inflows:Sale of goods                                                                                                              27,818GST collected from customers                                                                                   2,024Interest receipts                                                                                                           1,833Others                                                                                                                         560OutflowsCost of goods sold                                                                                                      (20,400)Employee expense                                                                                                      (2,029)Supplies and services                                                                                                  (1,857)Other                                                                                                                           (222)   Net cash provided by operating activities                                                                   $7,727 Cash flowfrom investing activities:InflowsSale of property, plant and equipment                                                                          10OutflowsNetpayment for property, plant and equipment                                                         483Net cash used in investing activities                                                                           $8,220 Cash flowfrom financing activities:Loan from banks                                                                                                         (17,178)Personal equity                                                                                                           23,535Net cash from financing activities                                                                              $14,577Net increase in cash held                                                                                            1,084Cash at the beginning of financial year                                                                      4,026Cash at the end of reporting year                                                                                $19,687 ConclusionThe main aim of this case study was to providethe owner of George’s trains’ advice on his store working capital practices.The advice provided included George train description of working capitalprocess, along with an explanation of different capital budgeting processmethods.

Adding to this information, there were discussions on therecommendation of George’s trains. Finally, there was a provision of cash flowstatement template to help George’s trains to enable the owner in tracking howthe companies are operating, where they get the money from and where the moneyis used.


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