259

Discuss, with supporting calculations, the possible effects on Gorwa Co of an increase

in interest rates and advise the company of steps it can take to protect itself against
interest rate risk.

See if can finance company more through equity, Lengthen time to pay suppliers, not hold as much
inventory, have stronger credit control fuction

Mainly variable rate, could look at switching to fixed rate, increased financial risk, high interest rates
reduce profit, long term debt is usually more expensive than short term. Options and futures could
be considered in short term.

260

Discuss the key factors which determine the level of investment in current assets.

Approach of management, NPV of projects to invest in, liquidity, profitability, maintaining supplier
goodwill, maintaining enough inventory to meet demand.

Length of working capital cycle, terms of trade, policy of investment in current assets, industry which
organisation operates.

Briefly discuss the ways in which factoring can assist in the management of accounts
receivable.

External company with more expertise can chase debts, don’t have to pay for CC department, collect
debts quicker,

Company turn over admin of sales ledger to it’s factor, offer finance to the company, Without
recourse no risk of bad debts

261

Discuss ways in which PKA Co could improve the management of domestic accounts
receivable.

Chase debts quickly, send regular statements, make phone contact, send invoices out promptly and
correctly

262

Critically discuss the similarities and differences between working capital policies in
the following areas:

(i) Working capital investment – Amount invested within working capital

Level of investment in working capital, compare with other company’s

(ii) Working capital financing – How the working capital is financed, could be by overdraft or loans,
factoring.
Level of short term and long term financing, matching, aggressive or conservative, fluctuating
current assets is the change in level of current assets, permanent current assets represent core level
of investment in current assets

263

Discuss how risks arising from granting credit to foreign customers can be managed
and reduced.

Take out insurance, Foreign Factoring, Trade through an intermediary who may be more familiar
with local laws,.

Longer trade, Receivable days increase, open account – agree to settle at specific date (high Risk),
Credit checks, Insurance, Export factoring, Letter of Credit – payment guarantee banked by bank

265

Identify and discuss the factors to be considered in formulating a trade receivables

management policy for ZSE Co.

Attitude to risk, relationship with customers, finance charges

Credit analysis, credit control, collection procedures

Discuss whether profitability or liquidity is the primary objective of working capital

management.

Work in harmony, higher working capital more liquid but less profitable and visa versa.

267

Briefly describe the benefits of a just‐in‐time (JIT) procurement policy

Ordering stock when it is required, not holding large amounts

270

Discuss THREE factors which determine the level of a company’s investment in

working capital.

Attitude to risk, Liquidity, profitability, other areas of investment

Nature and length of working capital cycle, working capital investment policy, Efficiency of
management and terms of trade

271