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...

Cash management - involves the construction of a cash budget Always necessary to hold some cash for transactions, precautionary reasons and for speculative purposes (awaiting a business opportunity) Cash flows should be monitored Excess cash should be profitably invested Provision of overdraft facilities should be negotiated in case of cash shortage. IMPROVING THE CASH POSITION 1) Short term ▪Reduce current assets (stock and debtors) ▪Increase current liabilities (delaying payments) ▪Sell surplus fixed assets 2) Long term ▪ Increase equity finance ▪ Increase long term liabilities ▪ Reduce net outflow on fixed assets SHOULD SELLING PRICES BE DISCOUNTED? Price discounting is designed to improve the cash flow into the business. It generates cash through increased sales. Also reduces stock levels. BUT... ▪It may undermine the firm's pricing structure ▪ It may leave the firm with low stocks ▪ It's success does depend o...