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Business Lindsay Emma Rudd
BMA




Working Capital
What is Working Capital?
Working capital measures the amount of money available to a business to pay its day to day expenses,
such as bills for fuel and raw materials, wages and business rates. Much attention is given to the
capital firms choose…

Page 2

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Business Lindsay Emma Rudd
BMA




The rate of Inflation ­ When prices rise rapidly, firms will require greater amounts of working
capital to fund the increased cost of wages, components and raw materials.

As a rough guide, a firm holding current (or liquid assets) of twice the value of current…

Page 3

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Business Lindsay Emma Rudd
BMA




meaning a business's receipts from sales decline dramatically while expenditure is temporally
unchanged.
Poor Credit Control. In a well managed business emphasis is given to monitoring debtors to
ensure that they settle their accounts and that they do so punctually. If a business fails to…

Page 4

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Business Lindsay Emma Rudd
BMA




Negotiate additional Can provide Can be very costly Firms experiencing
short term loans immediate inflow of May be difficult to short term liquidity
cash arrange in times of problems
Minimal long term a financial crisis
impact
Cut production costs Can improve May lead to Businesses…

Page 5

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Business Lindsay Emma Rudd
BMA




Liquidity ­ Class Notes
Liquidity is concerned with the relationship between ASSETS and LIABILITIES in a firm. There are tow
ways of assessing this:
1. Working Capital
2. The Acid Test Ratio

Working Capital
Working capital measures the amount of money available to the business…

Page 6

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Business Lindsay Emma Rudd
BMA




Acid Test Ratio
This compares the current assets with the current liabilities, but does not include stock, because cash
held in stock is not available straight away. The formula is
Acid Test = (Current Assets ­ Stock)
Current Liabilities

Liquidity Problems and Solutions

Problem =…

Page 7

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Business Lindsay Emma Rudd
BMA




Problem = Unexpected Changed in Demand
Solution = Source different suppliers
Sell assets

Problem = Seasonal Factors
Solution = Discount / reduce prices
Sale and leaseback of assets







7

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