Edexcel Business A Level Revision

Working capital - provides a strong indication of a business' ability to pay is debts. By adding together the totals for current assets and current liabilities in the balance sheet, a very important figure can be calculated – working capital. Working capital = current assets - current liabilities   Every business needs to be able to maintain day-to-day cash flow. It needs enough to pay staff wages when they are due, and to pay suppliers when invoice payment terms are reached. Maintaining adequate working capital is important both in the short-term (day-to-day) and the long-term. The challenge is to maintain sufficient liquidity in the business to ensure the business can survive and grow in the long-term. The current liabilities show the amounts that need to be paid in the next twelve months. Current assets show the cash and other assets that are available to settle those current liabilities. Of course the balance sheet is just a snapshot...

Working capital - is the cash needed to pay for the day to day trading of the business. Working capital "oils the wheels" of business. Businesses use cash to finance stocks through the production process It facilitates the smooth flow of production and the supply of goods to customers. In financing debtors, it enables the business to offer credit to customers. The amount of working capital needed depends on... The planned production volumes Forecast cost per unit The length of the production cycle Credit terms allowed to customers Credit terms received from suppliers. A lack of working capital means... Harder to buy in bulk and benefit from discounts Difficulties in offering credit to customer with the danger of losing sales Loss of reputation with suppliers if there are difficulties in settling debts Harder to respond to opportunities Increased danger of overtrading Dealing with working capital shortages... Discount prices Reduce purchases Negotiat...

Overdrafts - An overdraft is the facility to overspend on a current account up to an agreed sum temporarily. This money is needed only when working capital is insufficient to pay debts and bills. The business in effect can withdraw money from the account that is not there meaning they go overdrawn or in the red. Interest is charged on the overdrawn amount at a much higher rate compared to interest on a loan. Good short-term source of finance An external source of finance provided by the banks and building societies. ADVANTAGES OF OVERDRAFTS Only borrowed when required allowing flexibility Only pay for the money borrowed Quick and easy to arrange No charges for paying off the overdraft Not secured on assets of the business DISADVANTAGES OF OVERDRAFTS The bank can call it in at any time Only available from a current bank account Interest payments tend to be variable making it more difficult to budget Banks may secure the overdraft against the business' assets