This document discusses managing current liabilities to fund working capital. It explains that short-term assets like working capital should be funded by current liabilities like trade creditors and bank overdrafts. Trade creditors are preferable to fund working capital before relying on expensive bank overdrafts. The business can negotiate longer payment terms with suppliers to increase trade creditor funding. However, suppliers may increase prices or refuse further supply if payment terms are extended without approval.

1. Managing current liabilities
from
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2. Effective working
capital management is
all about keeping the
investment in the
current assets under
control so as to
minimise the amount
of funding required.

3. But what if it the
business is doing well
and more working
capital is needed?

4. Then the working capital has
to be funded somehow
The 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. So it makes sense
that working capital
(current assets) will
be funded by
current liabilities

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. In our Introduction to Working Capital
presentation we showed you the working
capital cycle and the way it dictates the
cash flow of a business
Let’s refresh that..........

8. Suppliers
give credit Operating
expenses
Stock
Cash
(inventory)
1 Creditors
2
(suppliers)
get paid
Trade
Sales Debtors
(Turnover) (accounts
3 receivable)
4

9. The big challenge
for the business is to
keep that cycle
turning as quickly as
possible to make
sure that there is
cash available to
make payments for
operating expenses
and trade creditors

10. But what happens if
the trade debtors
are not collected in
time to pay the
operating expenses
and the trade
creditors when they
fall due?

11. That’s usually
when bankers
get to meet the
business
owner/manager

12. Bank overdraft
Bankers tend to assume that
stock (inventory) is funded by
trade creditors (accounts
payable) so the bank overdraft is
intended to partially fund the
trade debtors (accounts
receivable) figure

13. So with a given
level of stock and
trade debtors
forming the
working capital
Working
capital =
Stock
(inventory)
Trade debtors
(accounts
receivable)

14. So with a given
level of stock and
trade debtors
forming the The accepted way
working capital to fund part of the
working capital
Working would be;
capital =
Stock Trade creditors
(inventory) (accounts payable)
Trade debtors
(accounts
receivable)

15. So with a given
level of stock and
trade debtors
forming the The accepted way
working 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. A relatively easy way
to fund additional
working capital or to
reduce reliance on
expensive overdraft
funding would be to
increase the funding
from trade creditors

17. ....which means negotiating longer credit
terms from the suppliers

18. ....which means negotiating longer credit
terms from the suppliers
It’s important that the business doesn’t
just take longer to pay without first getting
the supplier’s approval – the maxim is;

19. But there’s a downside to getting longer
credit terms from suppliers;
Suppliers may increase the price of
their product to offset the reduction in
their cash flow

20. But there’s a downside to getting longer
credit 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. Next, check out our
presentation and
podcast on assessing a
business’ working
capital management

22. There is much more free learning
content for anyone working in a
business banking or commercial
banking environment
on our website
Please visit us at
www.businessbankingcoach.com