Zakiya Stewart

MOB Assignment

1. One method of managing working capital is by managing debtors. Debtors can be managed in
many different ways, one way is by offering a discount to clients who pay promptly. A discount
refers to an amount or percentage deducted from the normal selling price of something. For
example, as debtors may take a very long time to make their payments, when given a discount
this would prompt them to pay faster as they are getting the chance to make the payment at a
lesser cost. With this the business won't have to wait a long period of time.
Another method of managing working capital is by managing credit. Credit can be managed by
extending the period of time taken to pay. The larger a business is, the easier it is to extend the
credit taken. This is often a great burden for small businesses that trade with larger ones. This
leaves the business with more working capital as the business is now paying at a later date instead
of paying all at once for these goods.
Another method of managing working capital is by managing stock. Inventory control is an
essential aspect of working capital management. Stock can be managed by doing just-in-time
stock ordering. There are dangers here if demand has not been forecast correctly, if there is a
sudden change in demand, if suppliers are unreliable or if there are delivery difficulties. For
example, a business may order goods that are of high demand but their supplier doesn’t have any
of that particular goods in stock causing the business to be at a downfall because they are out of
stock with their best seller.

2. Three advantages and disadvantages of using EQUITY capital over DEBT.

Advantages
● No interest has to be paid~ interest costs add
to the overheads of a company. Since there are
no required monthly payments associated with
equity financing, the company has more
capital available so the company can now
invest that capital towards growing the
company. On the other hand, debt capital may
include high interest rates that the company
may have problems to pay.
Disadvantages
● It is costly~ Equity investors expect to
receive a return on their money. Equity
capital reflects ownership while debt
capital reflects an obligation. Typically,
the cost of equity exceeds the cost of debt.
The risk to shareholders is greater than to
lenders since payment on a debt is
required by law regardless of a company's
profit margins.

● The gearing of the company is kept low~
gearing is kept low and this is a less risky
strategy than high gearing which means a
company has substantial loans to repay even at
times of low profits or economic difficulties.
When a company is not dependent on loans to
● The ownership of the company is
diluted~ issuing more shares to raise
additional capital can dilute the ownership
and control of the existing shareholders
and owners of the business unless these
owners buy all the new shares. Whereas,
 provide finance this indicates that the gearing
of the company is kept low. Debt financing
however, may have a high gearing as there
may be many loans to repay whether or not the
company is facing economic difficulties.
● Does not have to be repaid~ Seeing that it is
permanent capital, there is no need to repay
investors. Only when the company is ‘wound
up’, will this capital be redistributed to the
owners. With equity financing, there is no
obligation to repay the money acquired
through it while debt financing requires the
loan to eventually be repaid.
debt financing has no dilution of
ownership.
● Dividends are paid out after tax profit~
they are not ‘tax deductible’. Dividends
distributed to shareholders are paid out of
after-tax profit and therefore is not a
tax-deductible expense, whereas interest
payments are eligible for tax benefits.