Wk9 Working Capital Management Flashcards
Working Capital?
Net Current Assets
Current Assets?
Cash, stock and debtors
Working Capital Formula?
WC = Current Assets - Current Liabilities
What are the key areas of Working Capital Management?
- Management of Stocks
- Management of Cash
- Management of
- Debtors and Creditors
What can management of Stock/ Inventory include?
- Raw mats
- Works in progress
- Finished goods
- Goods for resale
Potential issues with maintaining high stock levels?
- Excess capital tied up in the stock (adds to cost)
- Higher storage costs
- Greater risk of deterioration
- Greater risk that changes in demand will leave the stock wasted
Potential issues with maintaining low stock levels?
- Interruption to production could harm sales
- Increase in transaction/ ordering costs due to more frequent purchasing
- Loss of economy from missing out on wholesale transactions
What is Economic Order Quantity (EOQ)?
Identifies the most optimum order size to minimize overall cost of stocks
What is the Economic Order Quantity (EOQ) formula?
B = Transaction cost per order
C = Cost of holding inventory per period
N = Quantity used annually
Problems with holding too much Cash?
- Loss of interest
- Loss of purchasing power
- Indicated there is low uptake of investment opportunities, not efficient utilization of capital
Problems with holding insufficient cash?
- Annoyance of suppliers
- Inability to cope with emergencies
- Opportunities could be missed
- Loss of discount from suppliers
- Credit rating may fall due to low current/ acid test ratio
What is the EOQ for Cash Formula?
A = Annual Requirement of
C= Cost of transaction to obtain cash
H = Cost of holding cash (foregone interest)
Ways to reduce losses from provision of credit?
- Offer incentives for early payment
- Set robust credit standards
Possible actions to take over late payers?
- Reservation of ownership clause
- Settle for reduced amount
- Legal action
- Write off bill as a loss
