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...

Trade credit - This means paying suppliers a period of time after the goods or services have been received. Type of supplies bought on trade credit is normally things such as stock and raw materials. It gives the business time to use the supplies to produce and sell the output before paying the invoices.   IT HELPS WITH CASH FLOW PROBLEMS   In effect the supplier is providing the business with finance for the period of the trade credit e.g. 30 days.   The business may lose out on discounts offered for the immediate or quick payment increasing costs.     BUT.......     In the long term this method of finance is not suitable for long term or large purchases.   New businesses may be required to pay in advance until credit terms are agreed.      

Other business - funds that can be provided by other businesses, sometimes referred to as B2B finance. Typically businesses with healthy cash balance may look to invest in other businesses. This may be with a view to higher potential returns than the business is receiving with cash sat in the bank. This is particularly true at present with low interest rates. Alternatively, this may be to support another business e.g. set up a subsidiary business, support a supplier or support a customer. ADVANTAGES OF OTHER BUSINESSES Includes trade credit, factoring (buying invoices), hire purchase and leasing and corporate venture capital. DISADVANTAGES OF OTHER BUSINESSES Trade credit is only short term Factoring reduces profitability Hire purchase and leasing can be expensive Venture capital may involve some loss of control. Best for... trade credit is suitable for all creditworthy businesses. Leasing is like renting.