How Does Net Cash Accrual impact the Working Capital?

This is a conceptual question but often people get perplexed and instead of logically thinking about the concept they try to find the formula for Net Cash Accrual. So get the concepts cleared first!

Two Accounting Method: Cash and Cash Accrual Method

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Small firms and businesses mostly follow Cash Method i.e. recording every transaction in cash when the transaction actually happens.

EXAMPLE: Anita sells a furniture in the month of March and amount received in April. In her books, she will record cash received in the month of April. It will show income in April even if no Sale happened and no income in the month of March even after the sales

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In cash method, non-cash items like Depreciation, Goodwill etc are not accounted for. Also, prepaid expenses or losses cannot be amortised over the period of time i.e. if B buys stationery worth Rs.10,000/- for the whole year or more, it will show Rs.10,000 in 1 month and not distribute the amount over different months.

On the other hand in Cash Accrual Method,

–           timely depreciation is shown

–          Prepaid expenses or losses can be amortised. Eg: Every month Rs.1000 can be shown in the expenses

–          Bills payable or receivable are shown when the credit purchase or sale happens and not wait for the actual transaction (i.e. the date of receiving or paying the amount). So if the sale happens in March, it is taxable in the previous year even if amount is received in April

So choosing either of the method will give you different profit and different presentation of your cash flow amounts.

Net Cash Accrual Method not only shows how much Sale actually happened but also the Cash in Bank, Receivables and Payables, Non-cash Items like Pre-paid Expenses (which can be monthly written off)

So over all it shows a detailed picture of Working Capital and WC will increase if all the positive balances are added.

Hope this article helped you.

-D.V.P

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Why Companies strive to perform higher to maintain high Market share price even when they receive money only once through IPO?

Shareholders are the owners of the company no matter in what minuscule amount. They provide the money to the company when the company needed it. And that is the reason the company pays dividends to its shareholders out of its profit. Now shares are not only held by public but also the promoters and management. As the shares are traded in the market the price certainly vary but the company retains its own value in the books of accounts and not the market price. The dividend paid is also on its Face Value and not the market price. As the company performs good, the market demand for its share increases and so is the reputation and goodwill of the company. The Management holds the majority shares, so  if the market share price is going rocket high because of its performance imagine how much the management themselves are profiting by holding these shares! I hope you understood.

Further Question asked on it: .but the shares that are held by any shareholder has only a virtual value until it gets exchanged for money…..so my question now is that why does the market price of the share fall even when a company provides its best performance (topping the industry) but could not meet the projections of market analysts who may or may not have a clue of whats happening in the company?

That’s mostly depended on the Demand and Supply factors of the shares resulting mostly from the speculations. When company performs good but do not meet the projections, speculators assume the company’s price will fall and it may be not a good idea to hold it.. so as the number of sellers increase than the demand… the stock prices fall. But if its a fundamentally strong company, it need not worry. Long term investors and the company’s management, peformance and growth opportunities always make it a valuable share in the market