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control of working capital

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Problems caused by Insufficient Working Capital With the suppliers A firm with too little working capital will struggle to pay its bills on time as they would not have no money to pay off their debts which can be a big problem .It would also mean that they do not have no spare cash or change for themselves in case of any emergencies which may also resort to delaying payments to their own suppliers. It may need to borrow more money. Delaying payment also means that suppliers are not paid on time which may also reduce the credit period or refuse credit for a future order. So by them have insufficient working capital, would stop their business from functioning properly as they do not have money. With banks If the business is resorting to borrowing it will have the additional cost of interest charges as they would have bad working capital; as they do not have any money for their business. If the bank is concerned about the liquidity situation it may impose higher charges. The business will find it more difficult to get loans as they would have working capital problems. Any lender will want to be assured that the company is managing its working capital as they need to make sure that the business can pay them back their debts to the bankers, which is why they see if they are able to manage their working capital properly. Opportunities may be missed The business may not be able to buy supplies in bulk. ...read more.


It also needs to include an allowance for uncertainty, an extra 10% on to the expected cash requirement would usually be sufficient. For a new small firm such as a new restaurant, though, a bigger safety net can be wise. It can take months for word to spread sufficiently to push the business above its break-even point. Also the size of the order, as the larger the order is, the longer the business may get for credit as they would have a longer period of time of paying the suppliers back as they money would be large. Also regular order would give the firms credit than occasional customers as they would be known as loyal customers, so it would be very important for the supplier to make sure that the regular customers are happy, and by this, they give them a longer period of time to pay them back. How can a business manage its working capital? Maintaining good liquidity in a business is about managing the elements of the liquidity cycle. There are several ways that the business can minimise its working capital needs. These are centred on: Controlling cash as it is very important that businesses obtain maximum possible credit for purchases. Also stop any delays of payment from the customers, as the longer the supplier gives the debtors time to pay off their money, the more problems it may bring to the working capital. It is very important that business control all the money that is coming in and out of the business in order to maximize and manager the working capital. ...read more.


Typically, firms only allow �20 of working capital for every �100 of fixed capital (assets). Accountants usually advise a �50:�50 ratio. Managing working capital is not just about managing cash flow it is also about the timing and amounts of cash flow there is in the business which is very important. Working capital is mostly about managing the whole business and making sure that the business is running efficiently with its finances, good development and management. Efficient production keeps costs to a minimum and turns raw inputs into finished goods in the shortest possible time. Effective management of stock can have considerable impact on working capital requirements as they are able to save money as well as get a lot of money. Some ways that business can help control their working capital in the business is in their departments such as for example: Effective marketing as it ensures that the goods are sold and that demand is correctly estimated. This avoids wasted production as if the business had done poor marketing, they would have not sold all their products to their customer meaning production wastage and also loss of money as their product had not been sold. Also efficient distribution gets the goods to the customer quickly were the business can get their money very quickly and manage their working capital better as they would be able to pay off bills, wages equipment of even development of the business. The accounting department can help to control costs the finance of the business to make sure that they do not broke, and Effective credit control improves cash flow. Each of these can reduce the need for cash and/or ensure that sufficient cash is available for the business to meet its objectives. ...read more.

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