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e a business’s current assets, less its liabilities • current assets- cash, stocks of raw materials, WIP and finished goods, and debtors • current liabilities-trade creditors, tax(VAT, PAYE, & CT), dividends, loans, overdraft etc. • every business must have sufficient liquid resources (cash) to maintain day to day trading • sufficient liquidity must be maintained in order to ensure both the short and longterm future of a business

e ensuring that the business has and will have sufficient liquid resources • involves balancing the needs of ensuring the solvency of the business with making sure that the business achieves maximum return from its assets • holding too much cash is as much of a problem as not holding enough.e no interest to pay) it is worth accepting some risk of insolvency by increasing current liabilities and taking the maximum credit possible from suppliers • the volume of current assets required depends on the nature of the business e.WORKING CAPITAL MANAGEMENT • i.the business misses out on making a return on the assets that the cash could have bought • current assets can be financed either by long term funds or by current liabilities • current liabilities are a cheap source of finance.g a manufacturing company needs to . and some companies may consider that in the interest of higher profit (i.

hold more stock that a company in a service industry .

and very few creditors there will be an over-investment by the company in current assets • working capital will be excessive and the company will be described as over -capitalised • over-capitalisation means that the return on investment will be lower than it should be. and long term funds will be unnecessarily tied up when they could be invested elsewhere • the ratios that might indicate overcapitalisation are • sales/working capital • liquidity ratios • turnover periods . debtors and cash.• OVER-CAPITALISATION • if there are excessive stocks.

and this involves controlling the component parts of ‘working capital’ .WORKING CAPITAL AND CASH FLOW • the operating cycle i.e the period between paying creditors and receiving cash from debtors • purchase raw materials • pay creditors • produce goods • hold onto stock before selling • cash received from debtors • a company must have adequate cash inflows to survive. measures can be put into place to avoid any crises • managing the timing of cash flows is therefore very important. so management should plan and control cash flows as well as profitability • cash budgeting is a very important part of this process. because as shortfalls are anticipated .

must balance liquidity with profitability • methods of easing cash shortages: • postpone capital expenditurebut what if urgent? • press debtors.but risk loss of goodwill • sell assets • take longer credit • re-negotiate loan repayments • agree deferral of CT with IR • reduce dividends.but what about shareholder expectations? • surplus cash.THE MANAGEMENT OF CASH • how much should be kept as ‘cash in hand’ or ‘on short call’?. but must consider rates and notice periods .what to do? • if surplus long term could consider: • invest in long term high return asset • redeem some debt • pay dividend • if surplus not permanent could put on short term deposit.

THE MANAGEMENT OF DEBTORS • the efficient management of debtors is concerned with achieving an optimum level which involves • a trade-off between extending credit and therefore increasing sales and profits. and the interest and administrative cost of carrying debtors and suffering bad debts • analysis of individual customers is instrumental in deciding the level of risk a company is prepared to take in extending credit • debt collection management is also important in determining the volume of debtors and bad debts .

are discounts to be offered to encourage early payment (the cost will be the amount of the discount) • what the effect of easing credit might be e.g overdraft interest • any additional costs e.g extra work needed • the way credit policy is to be implemented.• formulating a credit control policy involves considering: • the administrative costs of debt collection • procedures for controlling the credit given to individual customers • the amount of extra capital required to finance an extension of credit e.g it might encourage increased bad debts • if the increased contribution from the additional sales exceeds the additional costs then extending credit will be worthwhile .

press cuttings etc • aged debtor listings should be produced and reviewed regularly • credit limits should be looked at before an order is allowed to proceed . including one from a bank • their credit rating should be checked through a credit agency • the credit offered should be set at a low level . and only extended when the payment record of the customer warrants it • any additional information on customers should be kept if available e.• credit control: individual accounts • new customers should give at least two good references.g statutory accounts.

possible procedure • request payment by telephone • letter • personal visit • withdraw credit • involve debt collection agency • instigate legal proceedings .main areas to consider: • paperwork • debt collection • • paperwork • invoices to be sent out immediately after delivery • checks should be carried out to ensure that the invoices are correct • investigation of queries etc should be carried out promptly • regular statements of account should be sent out • debt collection.• debt collection.

THE MANAGEMENT OF CREDITORS AND SHORT TERM FINANCE • this involves • attempting to obtain satisfactory credit from suppliers • attempting to extend credit during periods of cash shortage • maintaining good relations with regular and important suppliers • sources of short term finance • trade credit • bank overdraft • factoring/ invoice discounting • trade credit is a very important source of finance. but the costs include • loss of early payment discounts • loss of supplier goodwill .

unnecessary costs will be incurred • stock ‘costs’ include: • holding costs. obsolescence.costs of ordering and delivery • shortage costs. if too high . the extra cost of buying in emergency stock (often at a high price).the cost of lost production and sales .i. where stock-out brings whole process to a halt .cost of capital tied up. insurance and pilfering • procuring costs. warehousing and handling costs. deterioration.THE MANAGEMENT OF STOCKS • for a manufacturing or retailing business stock can often amount to a substantial proportion of the total assets of the business • it is important that stocks are kept at the optimum level-if too low stock-outs will occur.e not having the item in stock when orderedthey include the loss of sale & contribution of the lost sale.

this will need to be considered if the supplier offers a discount for bulk buying • .cost of stock itself.

• stock control levels • there are 4 critical control levels that can be used to maintain stock at their optimum level • re-order level.this is often predetermined and considers the maximum rate of consumption and length of lead time(time between placing order & receiving stock) • maximum & minimum levels -stock levels must not exceed or fall below these limits • re-order quantity.a predetermined quantity that is ordered when the stock reaches the re-order level .

and businesses therefore have to work out when to reorder . so avoiding the need to carry stock -this can save on holding costs but is unsuitable for some businesses e.• some businesses attempt to control stock on a scientific basis e. This is often unrealistic.g EOQeconomic order quantity).g ensure that they don’t run out of stock in the re-order period many business hold a buffer stock • other businesses operate a JIT (just in time) system which involves ordering goods at the very last minute. but this depends on various assumptions e. and is considered too risky by many .g that demand and lead times are constant.