(current asset)
(current assets), and
(current liability)
In addition, the current (payable within 12 months) portion of debt is critical, because it represents a short-term claim to current assets. Common types of short-term debt are bank loans and lines of credit.
Any change in the working capital will have an effect on a business's cash flows. A positive change in working capital indicates that the business has paid out cash, for example in purchasing or converting inventory, paying creditors etc. An increase in working capital will have a negative effect on the business's cash holding. Also a negative change in working capital indicates lower funds to pay off short term liabilities (current liabilities), which may have bad consequence to the future of the company.
Dudley Hotels Working Capital
The amount of working capital which Dudley Hotel has taken out is not to a great extend but compulsory assets like, Bank and Debtors. These are the main two assets which the business needs to keep it running for e.g.…
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Bank – With this asset in the business’s hold the business does not have any mean of problems as finance flows in steadily. Having bank as an asset the business knows that they can turn this into cash easily.
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Debtors – having a debt could also be an advantage to Dudley hotel knowing that they have some mean of finance coming in. 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.
(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.
The “Creditors Payment Period” the business has to pay all its payments in 243.33 days, in this time the business needs to pay any business it owes money to. If not able to pay off the business it could lead to bad times.
Maintaining Capital
The way Dudley Hotel maintains its capital is by showing how the accounts are and where and how the finances are coming in and out of the business. Dudley Hotel has capital coming from every liability it has by creditors and debtors. By knowing how much it is Dudley Hotel needs to make a cash flow showing every aspect of transaction.
Dudley Hotels ratio’s show what the business is paying and how long it will take and how much it is gaining from the outer side of the business. The way Dudley Hotel maintain its capital is from its customers from the service they offer. The time when capital is at a good potential is in the holidays when tourists are at a peak. If Dudley Hotel has a good income then creditors can get paid back quicker and save the time and hassle in when the payments need to be made. The other advantage the business has that the Hotel has also forwarded its services to the government for any families to stay to stay as long as they get the finances in.
There is a very simple way of showing how a business handles its incoming and outgoings. Above is a diagram which shows Dudley Hotels working capital life cycle. This illustrates how the business goes fourth with its stock and the way it pays off its debtors and what it gets to keep when it has nothing to pay its outstanding businesses.
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.
