Page 265 - Cambridge IGCSE Business Studies

20: Cash-flow forecasting and working capital

CASE STUDY Metrorail

Cash Flow Problems at Metrorail
East Rand-based Sinqobile about 80 are mounted. So far we
Equestrian Security Services have managed to feed the horses
was forced to take Metrorail to and pay the guards,’ Sinqobile
court to try to recover money it director Andries de Klerk told
was owed. It lost the case, but the paper.
the company has since man- Metrorail fi nancial manager is
aged to recoup R1.5m and has quoted as saying that ‘supplier
been promised the balance payments were being delayed
‘soon’. due to Metrorail experiencing
‘We supply about 450 security cash fl ow challenges in meeting
guards to Metrorail, of which its fi nancial obligations’.

Source: Adapted from www.railwaysafrica.com/blog/2010/02/
cashfl ow-problems-at-metrorail

TASK
a What is meant by ‘cash flow’?
263
b How has the cash-flow problem at Metrorail aff ected Sinqobile?
c Why might the cash-flow problem be worse for Sinqobile than it is for Metrorail?
d How might Sinqobile overcome its cash-flow problem?

Working capital

All businesses must have enough finance to pay for their day-to-day expenses such

Liquidity: see Chapter 23, as paying workers’ wages and buying raw materials. Many businesses off er their
page 288. customers credit terms, so they must also be able to finance the level of credit given

to these customers.
Working capital measures the liquidity of a business. Liquidity is the
KEY TERM ability of a business to pay its short-term debts. A business which does not
have enough working capital will be illiquid. That means it cannot pay its
Liquidity: the ability of a
short-term debts. If this happens the business may have to borrow the finance
business to pay its short-term
debts. required. It will have to pay interest on the amount borrowed and this increases
the business’s costs. However, if the business is unable to borrow the finance
required then it may fail.

The amount of working capital needed by a business depends on the
time it takes from buying raw materials, making these into goods for sale,
finding buyers for the finished goods and then receiving payment from

customers. The relationship between these is known as the working
capital cycle.