Week 9 Flashcards
What is working capital?
The difference between current assets and current liabilities
What are examples of current assets?
Trade debtors
Cash
Bank
Inventory
Prepayments
What are examples of current liabilities?
Bank overdrafts
Trade creditors
Short term loans
Revenues received in advance
How is trade credit obtained?
Purchasing items normally bought in cash on a credit basis or extending period taken to pay creditors
What is the advantage of trade credit?
It doesn’t bear interest.
In inflationary periods, debtors gain at the expense of creditors
What are reasons for holding cash balances?
Transaction motive
Precautionary motive
Speculative motive
What is transaction motive?
What is precautionary motive?
Emergency funds needed to ensure business can continue to operation when there are unforeseen payments/delays in cash receipts.
What is speculative motive?
What are the costs of holding cash?
Opportunity cost
Erosion of purchasing power
Increased risk
Banking and management fees
The cost of holding little to no cash?
Liquidity costs
Higher borrowing costs
Missed opportunity
Reputation damage
Potential for bankruptcy
What are the benefits of granting credit to customers?
Increased sales
Competitive advantage
Strengthened customer relationships
Interest earnings
What is the cost of granting credit to customers?
Delayed cash flows
Risk of bad debts
Administrative costs
Potential for increased costs
Potential legal costs
What is the importance of credit evaluation?
What is credit scoring?
Credit scoring is the process of calculating a numerical rating for a customer based on information collected on them
