Working Capital

Question 1

What is net working capital?

Answer 1

Current assets - current liabilities

Question 2

Objectives of working capital management?

Answer 2

Increase profits of business

Ensure sufficient liquidity to meet short-term obligations

Question 3

issue of profitability with low inventory?

Answer 3

Delivery lead times to customers are high, or business doesn’t have enough inventory. Affecting revenue

Question 4

issue of profitability with low receivables?

Answer 4

Business’ credit terms are overly strict and long credit periods aren’t available to customers. Affecting revenue

Question 5

Money tied up in short-term assets?

Answer 5

Causes liquidity issues

Question 6

if a decision is made to invest in high invnetory or receivables to boost sales and profits?

Answer 6

Higher net working capital and reduces liquidity

Question 7

If level of inventory and receivables is high because working capital is not managed well?

Answer 7

Improved in inventory management and credit control allows higher liquidity and profitability

Question 8

What influences net working capital planning?

Answer 8

General factors
Company-specific factors

Question 9

How can the nature of the industry affect working capital?

Answer 9

A supermarket will receive much of their sales in cash. However, not possible for a food wholesaler which relies on credit

Question 10

What happens if sales are higher for company specific?

Answer 10

Inventory and receivables higher too

Question 11

What is an aggressive strategy

Answer 11

Minimises net working capital

Question 12

What is a conservative strategy

Answer 12

Maximises net working capital

Question 13

Aggressive strategy characteristics

Answer 13

Inventory and receivables are low
Payables high

Prioritises liquidity but creates trading problems

Question 14

Conservative strategy characteristics?

Answer 14

Inventories and receivables are high
Payables low

Reduces liquidity but could help with trading problems

Question 15

Working capital ratios?

Answer 15

Inventory holding period
Accounts payable
Accounts receivable

Question 16

What is the cash operating cycle?

Answer 16

Begins in production and ends in collection of cash

Question 17

Cash operating cycle calculation?

Answer 17

Cash received - cash paid out

Question 18

Cash received?

Answer 18

Inventory
Receivables

Question 19

Cash paid?

Answer 19

Payables

Question 20

How to measure a cash shortfall if sales rise too quickly?

Answer 20

Use net working capital ratio

Question 21

Why is net working capital ratio important?

Answer 21

It considers the level of net current assets used to support revenue generation

Question 22

Lower level of net current assets to support revenue generation?

Answer 22

Aggressive strategy

Question 23

Higher level of net current assets to support revenue generation?

Answer 23

Conservative strategy

Question 24

What is overtrading?

Answer 24

A situation where a business has inadequate cash to support its level of sales

Question 25

Symptoms of overtrading?

Answer 25

Increase in sales revenue, receivables and inventory, trade payables

Worsening liquidity

Question 26

Why is there a fall in profit margins for overtrading?

Answer 26

Discounts are used to chase higher sales

Question 27

Mitigate overtrading?

Answer 27

Introduction of long-term capital
Improve working capital management
Reduce business activity