Working capital management - financial strategy Flashcards
(17 cards)
what falls under working capital management
- control of current assets = cash, receivables, inventories
- control of current liabilities = accounts payable, loans, over drafts
- working capital management strategies = leasing + sale and leaseback
control of current assets - cash
cash ensures that the business pays its debts in the short term so that the business can survive in the long term
- cash is the most liquid asset a business can own
Strategies for high/low levels of cash include
LOW LEVELS OF CASH
- sale and leaseback
- take out an overdraft
- Encourage discounts for early payment (increases cash flow)
HIGH LEVELS OF CASH
- Invest in equipment
- Secure a discount for repaying payables early
- buy materials in bulk to take advantage of discounts and lower prices
control of current assets - receivables
refers to the cash that another business is paying that is yet to be received
- invoices are issued (quantity price)
- the amount of time issued to pay (7-30 days)
- if customers do not pay back they are known as bad debts = the money is then written off
Accounts recivable - strategies
The business should have a credit policy that sets guidelines to staff on how to monitor and collect customers debt
- peanalising customers when payment is late
- rewarding customers that pay earlier with a discount
- checking the credit rating of prospective customers
- sending regular reminder notices
Control of current assets - inventories
Inventories are the businesses stock - they are usually the largest asset
- inventory is a cost to the business if it remains unsold
- too much inventory or a slow moving inventory will lead to cash shortages
Strategies for inventories
- procedures to monitor, control, and protect stock like physical inspections
- Develop an inventory management policy
Control of current liabilities includes
ALO
- accounts payable
- loans
- overdrafts
Control of current liabilities - accounts payable
- also known as payables, refering to the money that a business owes its suppliers (creditors)
- accounts must be paid by their due date to avoid any extra charges
- trade credit = where the business negotiates with their creditor to pay them back within 30 days after bought
- Trade credit acts as a cost-free finance (no interest)
strategies for controlling accounts payable
- take advantage of discounts for early payment offered by some creditors
- distribute payments (ensures for a stable cash balance) - also interest free for a certain period
- conducting a review of the suppliers eg the discounts they offer and interest free periods
control of current liabilities - loans
where funds are required to cover the sale and purchase of property or to pay creditors
strategies for loans
- take out a short term loan (although more expensive) can help with seasonal variations, or those who need to increase cashflow
- scout the market for the best possible deal - lowset interest
- budget loans (know that there is enough CA to cover the CL - debts)
- business should consider fixed of variable interest rate
control of current liabilities - overdraft
convienet for a business to overcome temporary cash shortages by overdrewing their account
Strategies for controlling an overdraft
- ensure that when cash is received it is used to pay off the loan (overdraft) so less interest is charged
- ensure that overdrafts are not used as long term sources of finance
- Compare different from banks
Strategies for working capital management incude
- leasing
- sale and leaseback
strategies - leasing
where the business rents an asset from another business to save money and balance cash flow
- reduces the amount of working capital spent if buying
- leasing is an expense that is tax deductable = when you buy you pay stamp duty
- over time it may cost the business more as they don’t own an asset that is appreciating in value
strategies - sale and leasback
where a business sells an asset to then lease a similar one to increase their cash inflows
- increases a businesses liquidity because cash is obtained from the sale is then used as working capital
- provides immediate cashflow that businesses are able to use
- avoids interest payments as an asset would
- the business must have a valuable asset to sell
