Managing Working Capital and Capital Expenditure Quiz

Study Notes

Managing Working Capital

Managing working capital can be achieved by managing inventory, managing the cash cycle, and managing trade receivables
Amount of working capital required increases with the length of the cash cycle
Managing inventory includes managing raw materials, work in progress, and finished goods
Managing the cash cycle involves managing accounts payable and accounts receivable
Managing trade receivables involves managing debtors who owe the business money

Capital Expenditure and Revenue Expenditure

Capital expenditure is long-term spending on non-current assets that last more than one year (e.g., buildings, land, plant, machinery)
Revenue expenditure is short-term, day-to-day expenditure on costs and assets other than non-current assets (e.g., wages, salaries, insurance)

Sources of Finance for Limited Companies

Internal Sources of Finance

Retained profits: profits left after all additions and deductions from sales revenue, also known as the "bottom line"
Limitations: not available to newly formed businesses or those trading at a loss; requires shareholder consent
Sale of unwanted assets: selling off unwanted assets to raise finances
- Limitations: may lead to decreased profitability in the long term
Reduction of working capital: lowering the amount tied up in working capital to free up money
- Limitations: may negatively affect the company's liquidity position
Sale and leaseback of non-current assets: selling an asset and then leasing it back to continue using it
- Limitations: may reduce long-term profit; requires cash to buy more profitable assets

External Sources of Finance

Short-term External Sources

Bank overdraft: a flexible short-term borrowing of money (a current liability)
- Limitations: interest is calculated daily; banks can demand repayment on short notice; high interest rates
Trade credits: delaying payment for goods and services received
Debt factoring: selling accounts receivables to a third party at a discount

Medium-term External Sources

Medium-term loans: loans with a repayment period of 1-5 years
Hire purchase: a type of loan where the borrower pays for the asset over time
Leasing: renting an asset for a long period of time
Medium-term loan: a loan with a repayment period of 1-5 years

Long-term External Sources

Share capital: raising finance by issuing shares
Debentures: long-term debt securities with fixed rates of interest
Bank loans: long-term borrowing from a bank
Business mortgage: a long-term loan secured against a property
Venture capital: long-term investment fund for small to medium-sized companies
Government grants: available to small and newly formed businesses as part of government assistance

Description

Test your knowledge on managing working capital which involves managing inventory, the working cycle, and trade receivables. Explore the concepts of capital expenditure including long-term spending and revenue expenditure.