Chapter 13 – The Management of Working Capital
Suggested Solutions
Discussion Questions
13.2 Working capital is the pool of trading assets and liabilities upon/with which a business conducts its day-to-day operations. Technically, it is measured by the difference between current assets (cash; debtors; inventory) and current liabilities (bank overdraft; creditors).
13.3 (a) The period from payment for supplies/raw materials/inventory to the supplier to the cash collection from sales of finished goods.
(b) It will vary as a result of:
i) Business activity (eg manufacturer or retailer)
ii) Credit policies (eg from supplier and to the customer)
c) The cycle should be reviewed for several reasons.
i) It is for this period that the firm is providing the credit, or having to finance the working capital.
ii) To check actual against budget, expectations or the past period results.
iii) To review the components in terms of:
• Obtaining early settlement discounts from suppliers
• The existence of obsolete or show moving inventory, or possibly inventory shortages problems
• The existence of slow paying debtors and possibly delinquent debtors account balances
• The limited provision of credit by suppliers
13.5 Holding excess inventory.
Possible benefits: ( Avoid production delays
• Avoid stock-out problems
• Purchase discounts for bulk purchases
• Defer the effect of price rises
• Reduce order costs
Possible costs: ( Finance costs to fund excess inventory
• Storage, security and insurance costs
• Potential obsolescence or product deterioration costs
7. Possible costs involved in extending the credit for customers
a) Finance...