Management of Working Capital OT

Question 1

Long-term finance examples?

Answer 1

Share capital and non-current liabilities

Question 2

What do non-current assets do?

Answer 2

Earn the profits

Question 3

Any normal business?

Answer 3

Sell and pay on credit
Certain level of receivables and inventory to supply customers
Short-term cash to pay the bills

Question 4

Does working capital earn profits?

Answer 4

No, non-current assets do

Question 5

If working capital too high?

Answer 5

Becomes inefficient (obsolescence, less cash available, too longer period of credit for customers)

Question 6

Overdraft balance short-term?

Answer 6

Yes

Question 7

Issue with short-term finance?

Answer 7

It is riskier than long-term (e.g. bank can call in overdraft, liquidity issues)

Question 8

Benefit of long-term finance?

Answer 8

Is committed but more expensive as no fluctuation must be paid

Question 9

If overdraft goes up and down?

Answer 9

Interest goes up and down. Long-term finance interest stays the same

Question 10

On average for borrowings?

Answer 10

Should be financed by long-term borrowings

Question 11

Day-to-day?

Answer 11

Use short-term finance

Question 12

Long-term?

Answer 12

Use long-term finance

Question 13

Current ratio?

Answer 13

Liquidity in the short-term. Must always be more than 1 otherwise risk of liquidation

Question 14

Why is inventory not liquid

Answer 14

Takes weeks to sell, therefore cash may not be available to pay the payables

Question 15

Payables in operating cycle?

Answer 15

Represent cash out

Question 16

Receivables in operating cycle

Answer 16

Represents cash in

Question 17

Operating cycle?

Answer 17

Cash in - cash out. How long we are without cash

Question 18

Payables increase in operating cycle?

Answer 18

Taking longer to pay suppliers means cash is received faster

Question 19

What do businesses want in operating cycle?

Answer 19

To keep it as short as possible

Question 20

Get money in from customers should equal?

Answer 20

How lnog we take to pay suppliers

Question 21

Overcapitalisaiton?

Answer 21

Level of working capital too high (inventory too high, payables too low)

Question 22

Overtrading?

Answer 22

Business increases too fast (twice as much receivables, inventory and payables). No cash and could mean an unplanned bank overdraft and loss of control

Question 23

If business doesn’t realise more worknig capital is needed?

Answer 23

Time lag between profitability, causing liquidity problem as returns aren’t immediate. Could shutdown if poor planning

Question 24

Resolve issue with overtrading?

Answer 24

Should raise the working capital

Question 25

Overtrading effect on profit and cash?

Answer 25

Good profit but lack of cash