Working Capital Management Flashcards
What is working capital?
The capital represented by net current assets which is available for day-to-day operating activities
How to calculate working capital?
It is the difference between an organisation’s current assets and its current liabilities
What must be done to remain in business?
Have successful working capital
What does working capital compromise of?
A number of different items and its management is difficult because these are often linked
Consequences of cash flow problems?
Exceeding an agreed overdraft limit
Failing to pay suppliers
Inability to take advantage of discounts for prompt payment
What happens in the long run for insufficient working capital?
Unable to meet its current obligations and will be forced to cease trading even if it remains profitable on paper
If an organisation ties up too much of its resources in working capital?
Will earn a lower-than-expected rate of return on capital employed
Why is working capital cruicial for effective management of a business?
Current assets make up over half the assets of some companies
Failing to control results in business failure
If there is high investment in working capital?
More liquid but less profitable
If there is low investment in working capital?
Less liquid but more profitable
What is overtrading?
Insufficient working capital to support the level of business activity
What is over-capitalisation?
An excessive level of working capital, leading to inefficiency
If management is highly-risk averse?
It will take a conservative approach to the level of investment in current assets
What is current assets investment policy associated with?
Maintaining relatively high levels of inventory
Offering generous credit terms to customers to encourage demand
Holding high precautionary levels of cash
What if maangement has a higher tolerance of risk?
It would adopt an aggressive approach and drive down the levels of inventory, receivables and holdings of surplus cash
