Working Capital

Question 1

What are the three reason why you would hold cash?

Answer 1

A transaction motive.
A precautionary motive.
A Speculative motive.

Question 2

What is the transactionary motive for holding cash?

Answer 2

To meet its day-to-day commitments a business requires a certain amount of cash. Payments in respect of wages overhead expenses goods purchased. Must be made at the due date. Cash has been described as the lifeblood of our business. Unless it circulate through the business and is available for the payment of due/maturing obligations survival of the business we put at risk. A business must have sufficient cash to pay its debts when they fall due

Question 3

Describe the precautionary motive for holding cash.

Answer 3

If future cash flows are uncertain for any reason it would be prudent to hold a balance of cash. For example a major customer I will add some to the business is in financial difficulties the business can retain its capacity to meet at obligations by holding a cash balance.

Question 4

Describe the speculative motive for holding cash.

Answer 4

A business may decide to hold cash so that it can exploit profitable opportunities as and when they arise. For example by holding cash a business maybe able to acquire a competitor business that suddenly becomes available at an attractive price. Holding cash as an opportunity cost for the business that must be taken into account. This when evaluating the potential returns for holding cash for speculative purposes the cost of forgone investment opportunities must also be considered.

Question 5

What are the considerations for how much cash a business should hold.

Hint = 8

Answer 5

The nature of the business.
The opportunity cost of holding cash.
The level of inflation.
Availability of me if liquid assets.
The availability of borrowing.
The cost of borrowing.
Economic conditions.
Relationship with suppliers.

Question 6

What is the benefit and role of preparing a cash budget?

Answer 6

Cash budgets are useful tool to enable the business to manage cash effectively enables them to manage the cash budget in the cash flows. Statements enable business managers to see the expected outcome of planned events on the cash balance.And to anticipate periods where a cash surpluses or cash deficits are expected. When a cash surplus is expected to arrive managers must decide on the best use of the surplus funds. When I cashed up as it is expected managers must make adequate provision by borrowing liquidating assets, rescheduling cash payments and receipts to deal with this. Cash budgets are also useful in helping to control the cash held. The actual cash flows can be compare to the budget cash flow is for the period

Question 7

What is the operating cash cycle

Answer 7

The period between the outlay of cash to buy supplies and the ultimate receipt of cash for the sale of goods.

It is The timelapse between paying for goods and receiving the cash for the sale of those goods. The length of the OCC has a significant impact on the amount of funds the business needs to apply to working capital.

Question 8

What impact does the operating cash cycle length have on financing requirements?

Answer 8

The longer the cash cycle the greater the financing requirements and the greater the financial risk.

Question 9

How do you calculate the operating cash cycle

Answer 9

The operating cash cycle is average inventory holding period plus average settlement period for accounts receivable minus the average payment period for accounts payable.

Holding + AR - AP.

Question 10

What are the limitations of using the operating cash cycle

Answer 10

Not all days in the operating cash cycle but equally valuable. For example if the days in accounts receivable increase by one and the days in accounts payable increase by one we may find that the net increase in working capital may not benefit the business

Question 11

What are the five Cs of credit

Answer 11

Capital.
Capacity.
Collateral.
Conditions.
Character.