Quick questions on Cash flow and working capital management (HSC Business Studies)

Cash flow is the actual movement of cash into and out of the business over a period. A business can be profitable on the income statement but illiquid on the cash flow statement.

Working capital is the difference between current assets and current liabilities:

Woolworths Group balance sheet (illustrative, simplified from FY24 reporting):

Stagger outflows to align with the timing of inflows. Negotiate supplier-payment terms that match the cash cycle. Bunnings collects cash at the till immediately but pays suppliers in 60 days - the resulting negative working capital is a recurring cash benefit.

Offer customers a small discount (e.g. 2 percent) for paying within 10 days rather than 30. Trades a small margin for faster cash.

Sell accounts receivable to a factor for immediate cash. The factor pays 70-90 percent of the invoice value upfront, then collects from the customer. Useful when fast cash matters more than holding the full margin.

Hold enough for day-to-day needs but not so much that returns are sacrificed. Excess cash is usually held in a transaction account paying minimal interest; the cost is the foregone investment return.

Money owed by customers. Manage by clear credit terms, prompt invoicing, regular debtor follow-up, and accounts receivable turnover monitoring:

Stock held for sale. Manage by inventory turnover monitoring, JIT inventory (Topic 1), and ABC inventory analysis (focus management attention on the high-value items).

Money owed to suppliers. Manage by negotiating extended payment terms (60 v 30 days) and by timing payments to maximise float. Avoid late payment that triggers supplier penalties or relationship damage.

Short-term loans and the current portion of long-term loans. Refinance before maturity to avoid distress.

Use the overdraft as a flexible buffer for short-term mismatches; do not use it as a substitute for proper longer-term financing.

Rather than buy an asset (consuming cash), lease it. Operating leases convert capital expenditure into recurring operating expense. Useful for fleet vehicles, IT equipment, and store premises.

Sell an existing owned asset for cash, then immediately lease it back. Releases cash tied up in property or equipment while preserving operational use. Common with supermarket distribution centres, hotel properties and corporate head offices.

It can be a feature, not a bug. Supermarkets and fast-food chains operate routinely with negative working capital.