5. Sources Of Finace (ST)

Question 1

What is working capital

Answer 1

Net current assets

• Current assets - current liabilities

Question 2

Operating cash cycle ?

Answer 2

Inventory days + receivable days - payable days

Inventory days = receiving raw materials -> selling goods
Receivable days = selling goods -> receiving payment
Payable days = receiving raw materials -> paying supplier

Question 3

What are the the working capital investment policies

Answer 3

Aggressive - operating with low levels of inventory, trade receivables and cash
Increase profit but also risk as suppliers may stop trading with them

Conservative - operating with large cash balance inventory and trade receivables which lowers risk and profitability

Moderate - balance between the two, trad off between risk and return

Question 4

What are the the working capital funding policies

Answer 4

Conservative- LT finance used for permanent and some fluctuating current asset
ST finance used for part of fluctuating current assets Increase used if LT finance lower risk but decreases profit as you may be paying interest when you don’t need to be

Aggressive- ST finance used for fluctuating & some permanent current assets
LT- finance used for non-current assets & some permanent current assets
Higher risk higher profit

Moderate
ST used for fluctuating current asset
LT used for permanent current asstes

Question 5

What is Fluctuating current assets

Answer 5

Changes in working capital that arise in the normal course of business operations, such as when receivables are settled later then expected

Question 6

Permanent current assets

Answer 6

Inventory
Cash
Account receivables

Question 7

Non current assets

Answer 7

Property
Equipment
Plant

Question 8

What is overtrading

Answer 8

When a business has insufficient working capital to sustain its level of trading

Question 9

What are costs of inventory

Answer 9

Expensive as money is tied up in it and it’s not earning interest
Has to be stored
Needs systems for receiving and releasing goods

Question 10

What are costs of not holding inventory

Answer 10

Might not be able to provide stock when
purchased which will impact reputation

Small orders are expensive and will be more frequent

Question 11

EOQ

Answer 11

Economic order quantity
Q= optimum amount to order to minimise cost of having inventory

Cost of having inventory = holding and reordering cost

Average inventory level = Q/2

C = cost of holding an item of inventory for 1yr
Annual holding cost = Q/2 x C

B= Cost of one order
D = annual demand
Annual order cost = D/Q X Be

Question 12

What are the five C’s of offering credit

Answer 12

Capital 
Capacity 
Collateral
Conditions
Character

Question 13

What are the pros and cons of credit discounts

Answer 13

Used to encourage early payment
Saves financing costs reduces receivables and possible bad debts
But can be expensive

Question 14

Benefits of payables

Answer 14

If you take full amount of time to pay means you have the money and can interest else where

Question 15

What is cash needed for and what happens if you have too much or too little

Answer 15

Transactionary - planned things

Precautionary - unexpected obligations

Speculative - take advantage of opportunities

Too much cash - loss of earnings thru interest and purchasing power

Too little - can’t invest, loss of supplier good will, can’t claim discounts