Introduction Flashcards
What is working capital?
It is the capital available for conducting day-to-day operations of an organisation
Working capital = the excess of current assets overcurrent liabilities
Working capital management is the management of all aspects of both current assets and current liabilities to minimise the risk of insolvency whilst maximising return and assets
What is the working capital balancing act?
The main objective of working capital management is to get the right balance of current assets and current liabilities
There is a trade-off between cash flow versus profits (safe vs make money)
Miss management of working capital is a common cause of business failure
What are the consequences of poor working capital management?
Inability to meet bills as they are due
Over trading
Overstocking
What is the operating cycle?
It is the length of time between the entities outlet on raw material, wages and other expenditure and the inflow of cash from sales of goods
It is a measure of whether an entity is being effective in managing it working capital
- Raw materials.
- Work in progress.
- Finished goods.
- Receivables.
- Cash.
What factors affect the length of operating cycle?
Liquidity versus profitability decisions
Management efficiency
Industry norms . E.g retail versus construction.
Ways to reduce time in the operation cycle
- Manage inventory making the process more efficient.
- Manage receivables by getting a stronger credit control.
- Manage relationships with suppliers maximise length of credit terms without adverse effects.
What are the three working capital policies?
Aggressive policy
Reduces costs by holding lowest levels of current assets possible . This is very high risk.
Conservative policy
Reduces risk by holding higher levels of current assets . This incurs high costs.
Moderate policy
Balance between cost and risk
