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
2
Q
Control of Current Assets
A
- Cash
- Accounts Receivable
- Inventories
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
4
Q
Control of Current Assets: ACCOUNTS RECEIVABLE
A
- Sending customers’ statements monthly
- Following up on accounts that are not paid
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
6
Q
Control of Current Liabilities
A
- Accounts Payable
- Loans
- Overdrafts
7
Q
Control of Current Liabilities: ACCOUNTS PAYABLE
A
- Money owed to the business’s suppliers
- Discounts
- Interest-free credit periods
8
Q
Control of Current Liabilities: LOANS
A
- Investigating alternative sources of funds from different financial institutions
- Ongoing relationships with financial institutions
9
Q
Control of Current Liabilities: OVERDRAFTS
A
- Convenient and cheap form of short-term borrowing
- Way of dealing with the deficit
10
Q
Strategies for Managing Working Capital
A
- Leasing
- Sale and lease back
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
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
