Managing current liabilities

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The investment in working capital has to be funded somehow and it's usually the current liabilities that are used for that purpose. This presentation looks at which current liabilities are affected and how they should be managed optimally.

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Managing current liabilities

  1. 1. Managing current liabilities from businessbankingcoach.com in association with
  2. 2. Effective workingcapital management isall about keeping theinvestment in thecurrent assets undercontrol so as tominimise the amountof funding required.
  3. 3. But what if it thebusiness is doing well and more working capital is needed?
  4. 4. Then the working capital has to be funded somehowThe basic rule when funding assets is that short-term assets are funded by short-term liabilities..... .......and long-term (capital) assets are funded by long-term liabilities
  5. 5. So it makes sensethat working capital(current assets) will be funded by current liabilities
  6. 6. In this context there are really only two current liabilities that can be used for funding the current assets Trade Bank creditors overdraft (accounts payable)
  7. 7. In our Introduction to Working Capitalpresentation we showed you the working capital cycle and the way it dictates the cash flow of a business Let’s refresh that..........
  8. 8. Suppliers give credit Operating expenses Stock Cash(inventory) 1 Creditors 2 (suppliers) get paid Trade Sales Debtors(Turnover) (accounts 3 receivable) 4
  9. 9. The big challengefor the business is tokeep that cycleturning as quickly aspossible to makesure that there iscash available tomake payments foroperating expensesand trade creditors
  10. 10. But what happens if the trade debtorsare not collected in time to pay the operating expenses and the tradecreditors when they fall due?
  11. 11. That’s usuallywhen bankersget to meet thebusinessowner/manager
  12. 12. Bank overdraft Bankers tend to assume that stock (inventory) is funded by trade creditors (accountspayable) so the bank overdraft is intended to partially fund the trade debtors (accounts receivable) figure
  13. 13. So with a givenlevel of stock andtrade debtorsforming theworking capital Working capital = Stock (inventory) Trade debtors (accounts receivable)
  14. 14. So with a givenlevel of stock andtrade debtorsforming the The accepted wayworking capital to fund part of the working capital Working would be; capital = Stock Trade creditors (inventory) (accounts payable) Trade debtors (accounts receivable)
  15. 15. So with a givenlevel of stock andtrade debtorsforming the The accepted wayworking capital to fund part of the working capital Working would be; capital = Stock Trade creditors (inventory) (accounts payable) Trade debtors (accounts Bank overdraft receivable)
  16. 16. A relatively easy wayto fund additionalworking capital or toreduce reliance onexpensive overdraftfunding would be toincrease the fundingfrom trade creditors
  17. 17. ....which means negotiating longer creditterms from the suppliers
  18. 18. ....which means negotiating longer creditterms from the suppliersIt’s important that the business doesn’tjust take longer to pay without first gettingthe supplier’s approval – the maxim is;
  19. 19. But there’s a downside to getting longercredit terms from suppliers; Suppliers may increase the price of their product to offset the reduction in their cash flow
  20. 20. But there’s a downside to getting longercredit terms from suppliers; Suppliers may increase the price of their product to offset the reduction in their cash flow Suppliers may refuse to supply more product until they have been paid for previous deliveries
  21. 21. Next, check out our presentation andpodcast on assessing a business’ working capital management
  22. 22. There is much more free learning content for anyone working in abusiness banking or commercial banking environment on our website Please visit us atwww.businessbankingcoach.com

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