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Unit 5
FIGURE 15-9 Cash flow changes in most businesses from month to
month. Businesses must plan to deal with cash shortages and excesses.
(Thousands)
120
105
90
Shortage Excess
75 of Cash of Cash
60 Cash Receipts
Cash Payments
45
30
0
SEPT. OCT. NOV. DEC. JAN. FEB. MAR.
That means that even during the month of high sales, not a great deal of cash is
generated. The need for cash is greatest during September, October, and November
when the company buys its inventory of pianos to sell. It needs large sums of cash
to pay for the pianos, for sales promotions such as advertising, and for regular
operating expenses. The cash flowing out of the company from October through
December is greater than the cash flowing in.
Larger amounts of cash start to flow in during December from customers who
pay cash for their purchases. Credit customers who purchased in December, how-
ever, will make cash payments in January, February, and March. During these three
months, the flow of cash coming into the business will be greater than the cash
going out. From this information, managers can plan for short-term borrowing
during times of cash shortage. They can also plan when to make any needed large
purchases, so that their payments will be due when they have cash available to
pay them.
Teamwork tip WORKING CAPITAL
Working capital is the difference between current assets and current liabilities. The
Teams that rely on technol- word current refers to assets and liabilities that are expected to be exchanged
ogy to do most of their work for cash within one year or less, such as accounts receivable and payable. For
must be careful in the ways example, companies expect most customers to pay for their credit purchases
they communicate with each within a year. Therefore, accounts receivable are current assets. Similarly, com-
other. Many people are panies expect to pay for their credit purchases in accounts payable within a
uncomfortable relying on year, so accounts payable are current liabilities.
technology to communicate When current assets are much larger than current liabilities, businesses
rather than meeting face-to are better able to pay current liabilities. The amount of working capital is one
face. They feel that seeing indicator that a business can pay its short-term debts. Businesses with large
people’s faces, gestures, and amounts of working capital usually find it easier to borrow money, because
body language brings more lenders feel assured that these businesses will have the means to repay their
meaning to their words. New loans. The working-capital analysis for the Crown Corporation is shown in
technologies that combine Figure 15-10. Notice that the numbers used in the analysis are the current
audio, video, text, and visu- assets and current liabilities drawn from the company’s balance sheet shown
als help reduce that anxiety. in Figure 15-6.
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