What is working capital?
The lifeblood of a business used to meet immediate financial obligations.
Why is cash important in working capital?
It is the most liquid asset and can settle debts immediately.
Why are debtors and inventory considered less liquid?
They cannot be converted into cash quickly.
Why might a business convert current assets into cash quickly?
To improve working capital when struggling.
Give one method of converting current assets into cash.
Selling stock quickly or chasing customer payments.
How can extending payment terms from suppliers help working capital?
It keeps cash in the business for longer.
How can overdrafts improve working capital?
They provide short-term cash access beyond what’s in the account.
Can a business have too much working capital?
Yes.
What is the problem with holding large amounts of cash?
The business misses out on investing in assets or opportunities.
What does excess cash represent when interest rates are high?
A significant opportunity cost.
What is a problem with holding too much inventory?
Extra storage and handling costs.
Why is cash tied up in inventory a problem?
It cannot be used for other purposes.
What is a common exam mistake about working capital?
Confusing working capital with cash.
Why can a business fail even with positive working capital?
Less-liquid assets cannot pay immediate bills.
Example of a less-liquid current asset?
Trade receivables (debtors).
