BUSF_A01.qxd

Review questions

lMake judicious use of bank overdraft finance – it can be cheap and flexible.

lUse short-term cash surpluses profitably.

lEncourage direct bank transfers and bank cheques and cash frequently.

lTime transactions to best cash flow effect.

lManage exchange rate risk.

Trade payables

lCosts of taking credit:

lHigher price than purchases for immediate cash settlement.

lAdministrative costs.

lRestrictions imposed by seller.

lForeign exchange losses.

lCosts of not taking credit:

lFinancing cost.

lLost purchasing power.

lInconvenience – paying at the time of purchase can be inconvenient.

lPractical points on trade payables management:

lEstablish a policy.

lExploit free credit as far as possible.

lManage exchange rate risk.

lUse accounting ratios (for example, trade payables settlement period ratio).

Drury (2004) gives a full, yet clear, review of the various aspects of the management of work-

ing capital. Arnold (2005) and Atrill (2009) both cover the topics of this chapter and deal with

them in a UK context. An interesting article on aspects of JIT at Honda can be found at

http://www.carpages.co.uk/honda/honda-swindon-factory-06-02-06.asp.

Further

reading

13.1 Why is working capital a particularly important area of concern for financial

managers?

13.2 What is meant by ‘overtrading’, and how does it arise?

13.3 How is ‘obsolescence’ a cost of holding inventories?

13.4 In what ways is the basic inventories reorder model deficient in representing reality?

13.5 What credit checks would most prudent businesses take before dispatching goods in

respect of a credit sale?

13.6 For a business, what (briefly) are the advantages and disadvantages of using a bank

overdraft as a means of financing?

REVIEW QUESTIONS

Suggested answers to
review questions appear
in Appendix 3.