Managing working capital 2.1.4

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...

1. The planned production volumes
2. Forecast cost per unit
3. The length of the production cycle
4. Credit terms allowed to customers
5. 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...

1. Discount prices
2. Reduce purchases
3. Negotiate more credit from suppliers
4. Delay the payment of bills (but not for too long)
5. Credit control - chase trade debtors
6. Negotiate a bank overdraft
7. Debt factoring
8. Sales assets
9. Sale and leaseback