liquidity 2

Question 1

what is working capital? and examples?

Answer 1

working capital is the finance available for the day-to-day running of the business
examples: materials, stocks, wages day-to-day bills

Question 2

what is capital expenditure?

Answer 2

required to purchase machinery and equipment

Question 3

2 ways to manage working capital

Answer 3

1. ensuring the business has enough finance to meet its needs
2. keeping cash moving rapidly through the cycle, so there is enough to meet future orders

Question 4

businesses will also be subject to unexpected events what do they need to have to cope?

Answer 4

• generous overdraft limit

Question 5

how should a business manage its working capital?

Answer 5

1. control cash use

2. minimise spending on fixed assets

Question 6

how does a business controlling cash use help to manage its working capital?

Answer 6

• minimising stock levels
• keeping customer credit as low as possible (without pushing customers away)
• trying to get as much credit from suppliers as you can
• getting goods to the market in the shortest possible time, the sooner goods reach the customer, the sooner the payment is received

Question 7

how does a business minimise spending on fixed assets help manage its working capital?

Answer 7

• keeps cash in the business
• business must balance its needs for cash and its need for fixed assets
• a compromise is to lease rather than buy equipment
• increases expenses but conserves working capital

Question 8

Why is cash important to the business?

Answer 8

• bills cannot be paid = business fails
• long term = no funds are available for development so the business might not grow
• if working capital is tight and cash is short the business might not be able to buy supplies in bulk = variable costs per unit being higher than competitors= cannot exploit economies of scale