12.3 working capital (liquidity) management Flashcards

1
Q

Working Capital / Liquidity Ratio

A
  • Paying suppliers’ bills (accounts payable) and other expenses as they fall due
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2
Q

Control of Current Assets

A
  • Cash
  • Accounts Receivable
  • Inventories
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3
Q

Control of Current Assets: CASH

A
  • Ensures that the business can pay its debts, repay loans and pay accounts in the short term
  • Investment opportunities, such as short term money market
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4
Q

Control of Current Assets: ACCOUNTS RECEIVABLE

A
  • Sending customers’ statements monthly
  • Following up on accounts that are not paid
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5
Q

Control of Current Assets: INVENTORIES

A
  • Slow-moving inventory will lead to cash shortages
  • Insufficient inventory will lead to loss of customers, and hence lost sales
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6
Q

Control of Current Liabilities

A
  • Accounts Payable
  • Loans
  • Overdrafts
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7
Q

Control of Current Liabilities: ACCOUNTS PAYABLE

A
  • Money owed to the business’s suppliers
  • Discounts
  • Interest-free credit periods
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8
Q

Control of Current Liabilities: LOANS

A
  • Investigating alternative sources of funds from different financial institutions
  • Ongoing relationships with financial institutions
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9
Q

Control of Current Liabilities: OVERDRAFTS

A
  • Convenient and cheap form of short-term borrowing
  • Way of dealing with the deficit
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10
Q

Strategies for Managing Working Capital

A
  • Leasing
  • Sale and lease back
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11
Q

Strategies for Managing Working Capital: LEASING

A
  • Allows the business to make use of good quality assets, which might have been unaffordable to purchase upright
  • Lease payments are considered operating expenses and are therefore tax deductible
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12
Q

Strategies for Managing Working Capital: SALES AND LEASE BACK

A
  • Selling an owned asset to a lessor and then leasing the asset back through fixed payments for a specified period of time
  • Improve a business’s liquidity since it enables the business to receive a large cash injection from the sale of the asset
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