Management of Working Capital Study: “George’s Trains”
March 23, 2015
George’s Trains has been operational since 1962, and is currently Canada’s largest train store. The proprietor, George Olieux and his two sons have been running this profitable business using the capital budgeting system. He has asked the author to for advice on his working capital practices, and methods of capital budgeting analysis techniques. He understands that to continue running at a profit he may need to improve these practices. The author will analyze any potential pitfalls in his capital budgeting practices and develop a simple statement of cash flows for George’s Trains.
Working capital is the difference between total current assets and total current liabilities. According to Archavli, Siriopoulos, and Arvanitis (2012) “It is important to highlight the importance of managing working capital to ensure improved profitability, efficiency, and market value, as this aspect should be part of strategic and operational thinking.” The goal for George is to ensure that current assets remain higher than current liabilities. In the video, George mentions that he sells and repairs specialty racecars in their season, which adds to the current assets. Based on the way George does business it may be best to use the Net Present Value (NPV) to determine best business practices.
George’s method for his capital practices is to ensure that he constantly has items in stock but he does not order too many because of slow seasons. In this way, he is able to cut down on inventory while maintaining enough on hand to fill customer demands. He was able to keep his business up and running because he budgeted his capital well, ensuring available capital for emergency purchases. After looking at the cash inflows and outflows with an accepted discount rate he decided to stock and restock the shelves as needed according...