After to be aware of short term efficiency,

After
completing 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 business
that specializes in the sale, repair, and trading of model trains of all makes and
models. The organization is a family owned business that bases its business values
on honesty, fairness, and integrity (). The company has a staff that is knowledgeable
about model railroading alongside the various train models and other important.
Through this case study we shall examine George Train’s business and working capital
practices. Working capital refers to the financial metric that ensures
operating liquidity of a business organization, firm and other governmental
entities. Working capital management is an important concept for business
owners and managers of business to understand, and today George Train’s working
capital shall be examined, and analyze to determine areas of needed improvement.

Working
capital practices:

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Business
working capital is determined by dividing the current assets by current
liabilities (Jackson, 2016). This information is highly important and enables owners
and managers to be aware of short term efficiency, as well as gain a full understanding
of the business health as well as if the short time financial obligations can
be met (Jackson, 2016). Working capital is the difference of an organizations
current assets and liabilities determining the debt amount acquired in order to
finance its assets. The ratio gives an explanation if the company can be able
to pay its short-term debts through the current assets or not. The company is
sure of having problems of paying its loans (short term) if the current
liabilities exceed the current assets. John wanted to finance the inventory
purchase for his shop he then borrowed loan from the bank. Adding to this, he
also invests a given amount of personal equity in order to keep away from
bankruptcy.

Potential
pitfalls in George’s capital

The
pitfalls that are common in George’s capital budgeting procedure are as
follows:

 

1)      Lack of adequate capital structure

He
has lacked the proper methods of managing the amount of debt and equity that
would be a necessity when financing his business. The inadequate ratio affects
both the profit of the business and also disturbs his repute in the market. The
major issue in his firm is brought about by the fact that he may not be able to
pay his debts even in the future (Anthes, 2013).

     2). Incorrect opportunity and sunk cost

George
incorrectly included sunk cost in his calculation of the capital expenditure
but has excluded the high yield project opportunity cost.

3).Overstated NPV

He
sets inappropriate discount rate thus overstating the net present value for his
business i.e. he sets discount rates that are too low. According to the capital
practice, it is one of the wrong practices because it will insist him to
accepting the wrong project due to wrong and low rates of discounts used by
him.

4).
Cash flow errors

He
made some errors when estimating the business cash flows including both outflows
and inflows. Cash flows usually attract stakeholders and any cash flow errors
harm the company’s financial health.

5).
Did not incorporate current economic trends

His
business did not incorporate the recent economic trends in the market. No firm
can stand in the market without having to incorporate the current economic
trends (Anthes, 2013).

Cash
flows

A
cash flow system gives an overview of the cash amount which goes in and out of
a 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 as
shown below:

George
Company

Cash flow
statement

For
the year ended December 2016

                                                                                                                                    2016

                                                                                                                                    $(000)

Cash flows
from operating activities                                                                      

Inflows:

Sale of goods                                                                                                              27,818

GST collected from customers                                                                                   2,024

Interest receipts                                                                                                           1,833

Others                                                                                                                         560

Outflows

Cost 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 flow
from investing activities:

Inflows

Sale of property, plant and equipment                                                                          10

Outflows

Net
payment for property, plant and equipment                                                         483

Net cash used in investing activities                                                                           $8,220

Cash flow
from financing activities:

Loan from banks                                                                                                         (17,178)

Personal equity                                                                                                           23,535

Net cash from financing activities                                                                              $14,577

Net increase in cash held                                                                                           
1,084

Cash at the beginning of financial year                                                                      4,026

Cash at the end of reporting year                                                                                $19,687

Conclusion

The main aim of this case study was to provide
the owner of George’s trains’ advice on his store working capital practices.
The advice provided included George train description of working capital
process, along with an explanation of different capital budgeting process
methods. Adding to this information, there were discussions on the
recommendation of George’s trains. Finally, there was a provision of cash flow
statement template to help George’s trains to enable the owner in tracking how
the companies are operating, where they get the money from and where the money
is used.