Working Capital and Capital Budget Techniques Employed by Georges Trains (Movie Review Sample)

Management of Working Capital Case Study: "George’s Trains”
Name
Institution
Management of Working Capital
Introduction
Working capital can be simply defined as the money available to an organization to carry out its day-to-day operations. The ratio can be used to determine the liquidity of a company as it takes into account all current assets and liabilities such as inventory, accounts receivable, cash, portion of debts in a year, accounts payable and any other short-term accounts. An organization’s working capital reflects the results of activities carried out during the year including debt management, revenue collection, inventory management, and payments to suppliers. A positive working capital depicts that the company can pay off its short-term liabilities with immediate actions. Negative working capital, on the other hand, indicates that the firm cannot manage its current liabilities and can therefore not offset its short-term debts.
Discussion
The reasons as to why analysts are sensitive to decreases in working capital are because this drop signifies that the business is being overleveraged and is in constant struggles to grow and develop sales and is thus paying bills at higher rate compared to the rate which it collects its receivables. On the other hand, an increased working capital ratio represents the opposite outcome. It means that the company is paying less for the receivables but receiving much more from accounts receivable (Firth, 1976). Working capital can be further used to evaluate the accounts receivable ratios, current ratios and quick ratio.
When considering to introduce a new project, a business must determine whether the project can return on initial investments and subsequently generate a profit. Capital budgeting determines whether the business is worth of the project and helps a business firm to determine if it will make satisfying returns the owner and investors. Some considerations made in capital budgeting include the payback period, net present value, internal rate of return and discount rate.
George’s Trains
George Oliex, the proprietor of George Trains, applies both working capital processes and capital budgeting practices to maintain the firm in the short-term and subsequently through to the long-term. The working capital factors that he keenly considers include the bank loan that he uses to start the business and establish its reputation. Another working capital aspect that he seems to consider is the inventory account. When demand is low he cuts his expenses on the stock by half; from a dozen to half a dozen. When conditions are adverse, he further reduces his asset up to one unit and the re-stocks to six, ensuring they will never fall short of inventories.
George Oliex also depends on the bank for the second loan that he uses to purchase the building in which the shop is located. This will require him to evaluate the payback terms. The bank loan is a current liability which needs to be refunded over a short period to ensure that the day to day operations of the firm are taking place under no pressure from the bank. Through the purchase of this building, George makes a capital budget investment plan which will see the growth of the company even in the future (Goel, 2001). This move is bound to profit the organization at the long-run as it ensures that the value of the organization goes high.
Expanding the Train model requires him to concentrate much on maintaining the inventory levels rather than the sales levels as used to be the case with the others before him. Before considering the new project of acquiring the building, he carries out capital budgeting plans that weigh the amounts to be brought back as profits by the company. He realizes that demand grows at a particular and then goes down during another period. This cyclic process enables him in planning his working capital. When demand is bound to be low, he produces in lesser amounts than he does when there is high demand.
This changing pattern in demand acts as a motivation factor to produce new products that are supposedly required to maintain the cash flows made even in the future (Firth, 1976). In so doing, he can increase sales during certain seasons as well as safeguard the future. All these considerations that he makes including the payback period for the loans collected at the banks, the net present value of the company, discounting rates and the internal rates of return all form capital budgeting strategies that he employs.
George’s Trains Cash Flow Statement