Working Capital- Finance

Question 1

Define working capital

Answer 1

Working capital is the capital of a business which is used in its day-to-day trading

Question 2

What is working capital also known as?

Answer 2

Net current assets

Question 3

What is the formula for working capital?

Answer 3

Net Current Assets / Working Capital = Current Assets- Current Liabilities

Question 4

What are the 3 main Current Assets?

Answer 4

Cash, Stock and Debtors

Question 5

What are the 2 main Current Liabilities?

Answer 5

Creditors and Overdraft

Question 6

What are some causes of working capital problems? (5)

Answer 6

Poor control of inventories (stocks)
Poor control of receivables (trade debtors)
Ineffective use of payables (trade creditors)
Poor cash flow forecasting
Unexpected events

Question 7

Define a working capital cycle.

Answer 7

The time it takes for current assets or liabilities to be turned into cash

Question 8

Do businesses want a short or long working capital cycle?

Answer 8

Businesses want a short working capital cycle as cash should not be tied up in stock

Question 9

What are the 5 stages of the working capital cycle?

Answer 9

1. Business uses cash to acquire inventories
2. The stocks are put to work and goods/services are produced
3. These are then sold to customers
4. Some customers pay in cash but others buy on credit
5. Eventually they pay and these funds are used to settle any liabilities of the business

Repeat