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Impact of Finance on Business Decisions (Working Capital)

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Introduction

Impact of Finance on Business Decisions Task B Introduction The business which I will be looking into for its finances will be Dudley Hotel, as this is a well known business I have known for couple of years. Dudley Hotel is a private limited company as profits and limitations are all the owners. The owner has many current assets along with current liabilities which he has taken out to support his business. Also in my report I will show a diagram of Dudley Hotels Ratio. Also I will show an understanding of the working capital to see if the capital management is adequate. I will compare the two working capitals from the present year and previous to see how the business is doing. Working Capital Working capital is a valuation metric that is calculated as current assets minus current liabilities. Also known as operating capital, it represents the amount of day-by-day operating liquidity available to a business. A company can be capable with assets and profitability, but short of liquidity, if these assets cannot readily be converted into cash. ...read more.

Middle

Also the business can easily turn this amount into cash if not already. Dudley Hotel also has a current liability which it uses to pay off its creditors which need paying for purchases which have been made. Dudley Hotel Cash Flow Dudley Hotel Ratio Current Assets Debtor Collection Period 52.14 Days Stock (Opening) �20,000 Bank �5,400 Debtors �5,000 Total �14,000 Creditor Payment Period 243.33 Days Current Liabilities Creditors �10,000 Current Ratio 1.4:1 Total �10,000 Acid Test Ratio 1.1:1 Working Capital �4,000 Stock Turnover 1.83 Times Sales �35,000 Purchases �15,000 Stock (Closing) �15,000 Cost of Sales �32,000 (Diagram 1) What the Ratio's Show? From seeing the ratio figures in diagram 1 it shows us a better view of where Dudley Hotel is with paying back debtors and receiving payments from creditors. The "Debtor Collection Period" shows us that Dudley Hotel has 52.14 days to receive any debtors it has with any business. This figure is how many days the business has to pay back the money without it having any hassle, but if finances are not paid within this time limit then it could face severe penalties. ...read more.

Conclusion

From the cash the labour (employee's) are paid also with other purchases which are needed, after it is put into stock for customers to view, with Dudley Hotel it would be its bedrooms and services. Sales would be made which would lead to debtors and probably some cash towards the business. Evaluation of Managing Working Capital Working capital can be improved by increasing the rate of stock turnover and cutting back on debtor days. Within each of these categories there is a multiplicity of strategies, e.g. eliminating slow moving lines, offering discounts, prompt billings, charging penalty interest, etc. Another major source of working capital finance is creditors. Creditors can effect the finance operation without the owner being called upon to commit any of his own funds. In this way, goods can be bought on credit and be sold before the creditor has to be paid. In practice, strict control has to be kept on creditors and the type of stock that is purchased so that the working capital relationship is not eroded, thereby losing its effectiveness. ...read more.

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