5.2e Working Capital

Question 1

Working capital definition

Answer 1

Cash needed to pay for day to day operations of the business

Question 2

What does working capital cycle work out?

Answer 2

How long a business has to wait to receive payments for its goods from the point where it bought the supplies to make it

Question 3

Length of cycle formula

Answer 3

Length of cycle = length of time goods are held in stock + time taken for receivables to be paid - period of credit received from suppliers

Question 4

Amount of working capital available to a business is influenced by

Answer 4

• Cash flow problems
• Time taken to sell stock
• Time taken for customers to pay

Question 5

When does over-investment in capacity happen?

Answer 5

When a business spends too much on fixed asets

Question 6

When does overtrading occur?

Answer 6

When a business expands too quickly

Question 7

Implications of low inventory levels

Answer 7

• Less need for storage

- Less chance of damage or obsolescence

Question 8

Implications of high inventory levels

Answer 8

• Economies of scale

- Meet customer demand