Question

What are the major tasks in managing working capital and cash flow for international operations? What are the major steps in capital budgeting? For what types of ventures do international managers typically engage in capital budgeting?

ps. the answer must be typed in the text box

Answer 1

As a new small business owner, there are numerous tasks that now have to deal with on a daily basis. You have to make sure employees deliver the right services and products to customers. You also need accurate accounting services to manage business revenue, payroll, and expenses. So when people start throwing out new terms such as “working capital” and “cash flow,” you can start to become confused.

What is Working Capital and Cash Flow?

These two terms are not the same. Yet they do work together when it comes to letting you know about the current and future success or failure of your business.

Cash flow represents all the money that is flowing into and out from your business during a specified time frame. Cash flow can consist of accounts receivable, accounts payable, and inventory. So your sales transactions with customers, collection processes, invoices you have to pay to suppliers, office rent, loan payments and merchandise are considered cash flow.

Working capital refers to all the current assets as well as current liabilities in your small business. A current asset isn’t just the cash that you keep in your cash register. It also represents any assets such as equipment or inventory that can be converted into cash, which is called operating liquidity. Current liabilities are all expenses and debts that become due within a 12-month period.

What Can These Key Financial Metrics Tell You?

Both working capital and cash flow can give key indications regarding the financial health of your business now as well as in the future. By understanding both of these metrics, you can have a snapshot of how effectively your company is bringing in money and investing it back into your business operations.

When you have positive working capital, this phrase means that your small business is bringing in cash flow and current assets that can cover all business liabilities. If you have negative working capital, it means that your business cannot cover the current liabilities as you have more cash flow moving out of your business than what you are moving into it.

Now, just because your business has fantastic cash flow moving into your operations doesn’t mean that you have positive working capital. Your business may have incurred large, ongoing debts or you have invested significant amounts of money into the facilities where one slow sales season could see your business in financial trouble.

Managing Working Capital and Cash Flow

The best way to manage working capital and cash flow is to have accurate financial records throughout the life of your company so you can make the right financial decisions. You need to get back to your accounting basics and optimize your accounts receivable/accounts payable tasks so that you are invoicing your customers correctly and in a timely manner to further generate cash flow.

You also need to make smarter inventory management decisions. You want your small business to have the right amount of inventory to satisfy sales orders without sinking too much money into buying products that won’t move off the shelves fast enough.

Another thing to consider is how you are investing in your company. Are you purchasing equipment and products that are essential to operations and business growth or just throwing money away on the newest innovations that won’t have a significant impact on processes? Also, consider whether it is the right time to acquire debt from bank loans for business expansion, or if you are acquiring too much long-term debt that can make it difficult for your business to eventually repay.

Having accurate bookkeeping and financial records will always allow you to keep track of your working capital and cash flow for your small business. If you are worried about the financial health of your business, hiring outside accounting services can help you audit your financial records, spot mistakes, and offer advice on how to get your business back on track when you want to improve your working capital and cash flow management.

STEPS IN CAPITAL BUDGETING

The capital budgeting process consists of five steps:

1. Identify and evaluate potential opportunities. The process begins by exploring available opportunities. ...
2. Estimate operating and implementation costs. ...
3. Estimate cash flow or benefit. ...
4. Assess risk. ...
5. Implement.

Foreign capital budgeting analysis is the procedure for analyzing expected cash flows for a proposed direct foreign investment to determine if the potential investment is worth undertaking. In finance literature, foreign capital budgeting is also called foreign investment analysis. Capital budgeting analysis is concerned with direct (as distinct from portfolio) investments. Examples range from purchase of new equipment to replace existing equipment, to an investment in an entirely new business venture in a country where, typically, manufacturing or assembly has not previously been done. The technique is also useful for decisions to disinvest, that is, liquidate or simply walk away from an existing foreign investment. The overall foreign capital budgeting decision has two components: the quantitative analysis of available data (“capital budgeting” proper) and the decision to invest abroad as part of the firm’s strategic plans. Investments of sufficient size as to be important are usually conceived initially because they fit into a firm’s strategic plan. The quantitative analysis which follows is usually done to determine if implementation of the strategic plan is financially feasible or desirable.

International investment analysis is based on analysis of expected future cash flows from a foreign direct investment. The database for estimating future cash flows is often current and recent past financial statements. In addition, future cash flows depend on local accounting and tax treatment of profits and expenses. The essential difference between domestic and international investment analysis is that estimates of future cash flows are in different currencies and depend on local accounting methods. Those methods often differ from one country to another. This post has described the investment analysis, or capital budgeting process, for both a home country and an international project, and it has explained how different accounting procedures will influence the cash flow estimate.