Management of Working Capital OT Flashcards
Long-term finance examples?
Share capital and non-current liabilities
What do non-current assets do?
Earn the profits
Any normal business?
Sell and pay on credit
Certain level of receivables and inventory to supply customers
Short-term cash to pay the bills
Does working capital earn profits?
No, non-current assets do
If working capital too high?
Becomes inefficient (obsolescence, less cash available, too longer period of credit for customers)
Overdraft balance short-term?
Yes
Issue with short-term finance?
It is riskier than long-term (e.g. bank can call in overdraft, liquidity issues)
Benefit of long-term finance?
Is committed but more expensive as no fluctuation must be paid
If overdraft goes up and down?
Interest goes up and down. Long-term finance interest stays the same
On average for borrowings?
Should be financed by long-term borrowings
Day-to-day?
Use short-term finance
Long-term?
Use long-term finance
Current ratio?
Liquidity in the short-term. Must always be more than 1 otherwise risk of liquidation
Why is inventory not liquid
Takes weeks to sell, therefore cash may not be available to pay the payables
Payables in operating cycle?
Represent cash out
Receivables in operating cycle
Represents cash in
Operating cycle?
Cash in - cash out. How long we are without cash
Payables increase in operating cycle?
Taking longer to pay suppliers means cash is received faster
What do businesses want in operating cycle?
To keep it as short as possible
Get money in from customers should equal?
How lnog we take to pay suppliers
Overcapitalisaiton?
Level of working capital too high (inventory too high, payables too low)
Overtrading?
Business increases too fast (twice as much receivables, inventory and payables). No cash and could mean an unplanned bank overdraft and loss of control
If business doesn’t realise more worknig capital is needed?
Time lag between profitability, causing liquidity problem as returns aren’t immediate. Could shutdown if poor planning
Resolve issue with overtrading?
Should raise the working capital
Overtrading effect on profit and cash?
Good profit but lack of cash
