CONTROL OF CURRENT ASSETS

Question 1

Cash

Answer 1

• Balance in a businesses bank account
• Most liquid assets
  STRATEGIES →
  Sells accounts receivable to factoring firm
  Sale and lease back (sell assets to firm then lease/rent back)

Question 2

Receivables

Answer 2

• Funds owed to businesses from customers
• The effectiveness of control over accounts receivable accounts is measured using the Turnover Ratio: (Total Sales/Accounts Receivable)
• Ratio low = Customers take too long to pay → slows down a collection of revenue
  STRATEGIES →
• Check credit history and send notices
• Impose a credit limit
• Refuse credit to bad creditors
• Asks for deposits on orders

Question 3

Inventories

Answer 3

• The total amount of goods/materials in a business
• Must be monitored/protected otherwise the business will lose money
  STRATEGIES →
• Physical inspections/stocktake
• Security (cameras and tags)
• Limit staff access
• Keep accurate records

Question 4

Payables

Answer 4

• Money owed to suppliers (creditors)
• Credit Rating dictated the no. of days given to repay loans
• Paying too early = risk reputation with creditors
  STRATEGY →
  Pay bills on the last day they are due

Question 5

Loans

Answer 5

• Should be comparing cost/term of loans with other sources of finance
• Short-term loans (often expensive) may help businesses with seasonal variations
  STRATEGY →
• Floorplan Funding: supplier retains ownership of all inventory and is paid when items are sold

Question 6

Overdrafts

Answer 6

• Ensure that all cash received is promptly deposited in the overdraft account
  STRATEGY →
• Use online banking as it allows greater access to a business’ accounts

Question 7

Leasing

Answer 7

• Hiring of an asset in return of for a series of payments over a set period
• No deposit required.
• Expense is spread over longer period
• Lease payments are an expense = TAX DEDUCTIBLE
  Common items leased:
• Land, computers, office furniture and vehicles

Question 8

Sale and Lease Back

Answer 8

Selling non-current assets = injection of cash/capital → you are able to pay any expenses
Enter an agreement in which you lease back the asset from the ‘new’ owner
Regular payments to new owner of asset(s)