Working Capital Management (3) Flashcards
What is the working capital cycle?
Number of days between paying suppliers and receiving cash from customers
How is inventory purchased?
On credit from suppliers and is sold for cash and on credit
What if business holds its inventory for longer?
The longer it takes for cash to be collected from credit sales and the more quickly it pays its trade payables
The longer the cash operating cycle is?
The greater the level of resources tied up in working capital
What if there is an attempt to delay payment in operating cycle?
An attempt to delay payments could lead to a supplier demanding “cash on delivery”
What is meant by the operating cycle being negative?
Cash is received from sales before suppliers are paid. Could be the case with supermarkets
What do the costs of inventory include?
Storage
Security
Losses due to theft and obsolescence
If an organisation has insufficient inventory to meet demand? (short-term)
It will initially result in lost sales
If an organisation has insufficient inventory to meet demand? (long-term)
May also damage a business’s goodwill and long-standing customers may turn to other, more reliable suppliers
Key areas of accounts receivable?
Assessing creditworthiness
Setting credit terms
Monitoring and effective cash collection
The longer the debt is outstanding?
The greater the likelihood it will become bad
What is the most important source of short-term funding available to most organisations?
The practice of businesses extending trade credit to one another
What happens if a business cosntantly extends credit terms imposed by suppliers?
Its potential effect on the creditworthiness of a business
Cash and bank balances?
Liquidity problems often arise because inflows and outflows of cash do not coincide
What is essential in a business plan for cash?
Ensure that sufficient cash is available to meet expenses in the off-peak period
