CHAPTER 13 Financing the business 553Summary of learning objectives
13.1 Discuss the management of net working capital.
Working capital is the funds invested in current assets. Net working capital is current assets minus
current liabilities. In managing the level of net working capital, entities are concerned with main-
taining liquidity, the need to earn the required rate of return on assets and the cost and risk of
short-term funding. Entities use the hedging principle to match the sources of funding with the use
of that funding.13.2 Outline the issues underlying the management of cash.
Issues that entities must manage with regard to cash include the need to have sufficient cash, the
timing of cash flows, the cost of cash and the cost of not having enough cash. Entities must have
sufficient cash on hand to meet their bills on time. The timing of cash flows may be manipulated
to some extent, in order to have sufficient cash at all times and to optimise the returns to cash. The
cost of holding cash is the opportunity cost of holding liquid deposits, but the cost of not holding
sufficient cash may be the cost of arranging emergency loans, or could be the ultimate penalty:
insolvency and business cessation.13.3 Discuss the management of accounts receivable.
Accounts receivable provide benefits for entities but they also involve costs. The value of accounts
receivable carried by any entity depends on a number of policies and processes that the entity deter-
mines and manages. These policies and processes include credit policies and collection policies
and procedures. Credit policies include the decision to offer credit, selecting suitable customers,
setting credit limits and deciding payment terms. Collection procedures include the monitoring of
ageing accounts and putting in place steps to exert pressure on customers to pay.13.4 Identify the issues with respect to the management of inventories.
Managing inventories is an art, although there are techniques managers may use to transform much of
the role into a science. Inventories are held to facilitate both production and sales. The cost of holding
inventories includes both ordering and holding costs. Inventories may be managed by entities holding
minimum levels at all times while other entities use just-in-time (JIT) techniques to reduce costs.13.5 Compare the sources of short-term finance.
The most common sources of short-term finance for entities include accrued wages and taxes,
trade credit, bank overdrafts, commercial bills and promissory notes, factoring or debtor/invoice/
trade finance and inventory loans or floor-plan finance.13.6 Compare the sources of long-term debt finance.
Long-term debt finance is supplied to borrowers through financial institutions as intermediaries
or directly by the debt markets. Most entities tend to look to the financial institutions as sup-
pliers of intermediated finance in the first instance. For long-term funding purposes, most finan-
cial institutions offer fixed and variable rate business loans, instalment loans, interest-only loans,
fully-drawn advances and lease finance. Entities wanting to raise debt finance from the Australian
market have corporate bonds, notes and debentures to choose from as the financing media.13.7 Explain equity finance instruments and their roles.
Ordinary shares are the standard security by which companies divide and sell ownership rights
to investors who wish to buy part-ownership of the entities. Ordinary shares have an initial issue
price but, after that time, their price is set in the secondary market by the interaction of supply and
demand. Most larger public companies are listed on the securities exchange, but private entities
are not, no matter what their size. One of the major attractions of ordinary shares is their limited
liability. Preference shares are a hybrid form of capital, just as the convertible notes discussed
above are a mix of debt and equity. Preference shares tend to lean more towards equity than debt.
Additionally, companies raise funds through the issue of rights and options.