Hi Guys
Few questions coming my way on this.
Working Capital = Current Assets - Current liabilities
A current asset is something that can be sold or used up within one year. A current liability is something a business must pay back within one year.
Essentially working capital is looking at the liquidity of an organisation. The more liquid a business the easier it is for them to turn its assets into cash and pay off short term debts. Any business which cannot pay off short term debts is at risk of becoming Insolvent. It does not matter whether a business is due to make a million pounds of profit next month if they cannot pay off short term debts they will cease trading before they get that profit.
Businesses with liquidity issues need to consider financial contingency planning. In other words is customers don't pay debts or supplier miss delivery deadlines leading to losses of revenue what do we do? Negotiating overdraft facilities can be a good technique for some situations where the requirement is relatively small but consider the implications of a 50,000 pound tax bill when you have just lost a major bit of revenue for that month. You will now get that revenue in the following month but that is no help to you.
In this situation it can be prudent to organise a short term loan with a bank in order to cover the current liabilities. Banks will need to see your cash-flow and business plans etc. in order to grant this to you. Remember this is another argument for having a great relationship with your bank and businesses would need to be well established and have a great trading history and credit rating to be able to get this. A business without this may struggle and therefore fall into insolvency.
Cash flow planning and managing supplier and customer credit terms/payments is therefore very important. Can you put off a supplier payment for a month? Are they willing to extend your trade credit? Do this too often and the relationship sours.
Also consider stock control/management and having the required stock which is being turned into cash relatively quickly. If you don't turn stock into cash quickly you will be left with depreciating current assets and potential spoilage costs. All in all not a good situation to be in!
Few questions coming my way on this.
Working Capital = Current Assets - Current liabilities
A current asset is something that can be sold or used up within one year. A current liability is something a business must pay back within one year.
Essentially working capital is looking at the liquidity of an organisation. The more liquid a business the easier it is for them to turn its assets into cash and pay off short term debts. Any business which cannot pay off short term debts is at risk of becoming Insolvent. It does not matter whether a business is due to make a million pounds of profit next month if they cannot pay off short term debts they will cease trading before they get that profit.
Businesses with liquidity issues need to consider financial contingency planning. In other words is customers don't pay debts or supplier miss delivery deadlines leading to losses of revenue what do we do? Negotiating overdraft facilities can be a good technique for some situations where the requirement is relatively small but consider the implications of a 50,000 pound tax bill when you have just lost a major bit of revenue for that month. You will now get that revenue in the following month but that is no help to you.
In this situation it can be prudent to organise a short term loan with a bank in order to cover the current liabilities. Banks will need to see your cash-flow and business plans etc. in order to grant this to you. Remember this is another argument for having a great relationship with your bank and businesses would need to be well established and have a great trading history and credit rating to be able to get this. A business without this may struggle and therefore fall into insolvency.
Cash flow planning and managing supplier and customer credit terms/payments is therefore very important. Can you put off a supplier payment for a month? Are they willing to extend your trade credit? Do this too often and the relationship sours.
Also consider stock control/management and having the required stock which is being turned into cash relatively quickly. If you don't turn stock into cash quickly you will be left with depreciating current assets and potential spoilage costs. All in all not a good situation to be in!
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