Working Capital Management (4) Flashcards
What is a small business required to do if sales increase?
To acquire more raw materials to produce enough goods to meet the increase in demand while workers are required to work longer hours
How long could it take for cash from credit sales to be received?
It may take several weeks, whilst employees and suppliers require immediate payment
How to reduce problem with bank overdraft and loans?
Through negotiating better credit terms with customers and suppliers
When does overtrading occur?
When a company tries to support a large volume of trade from a small working capital base
What causes overtrading?
When a business grows very rapidly without increasing its level of long-term finance
Why can overtrading affect a new business?
No reputation to attract customers
Rapid sales expansion may occur
Lack of management skills for adequate control
Indicators of overtrading?
Declining liquidity and more overdraft
Rapidly increasing revenue
Increased receivable collection and inventory holding
Declining profit margin
Reduce operating cycle methods?
Increase level of long-term finance
Increase period of credit taken from suppliers
