9609 · 5.1.2
Working capital flashcards
Revision flashcards for Cambridge 9609 Working capital (syllabus 5.1.2). Flip, recall, then mark a real past-paper question.
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Working capital formula?
Current assets − current liabilities.
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Current assets?
Stock, debtors, cash — converted to cash within a year.
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Current liabilities?
Creditors, overdraft, short-term loans due within a year.
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Negative working capital?
Liabilities exceed assets — may indicate liquidity crisis.
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Improve WC how?
Reduce stock/debtors, extend creditor terms, inject cash.
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Overtrading?
Growth without enough WC — sales rise but cash runs out.
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Link to 5.3 cash flow?
Cash flow statement shows WC changes over time.
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Link to 4.2 inventory?
High stock increases current assets but ties up cash.
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What is the formula for calculating working capital?
Working Capital = Current Assets - Current Liabilities.
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Define the 'working capital cycle'.
The time period from paying for raw materials and other inputs to the final receipt of cash from the sale of the finished product.
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What is 'overtrading' in the context of working capital?
When a business expands its operations too quickly without having sufficient working capital to support the increased volume of sales, leading to severe cash flow problems.
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State one method of managing trade receivables to improve cash flow.
Offering customers a discount for early payment, or implementing stricter credit control procedures to chase overdue debts.
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What is a major consequence of having insufficient working capital?
Illiquidity, which is the inability to pay short-term debts as they fall due. This can lead to business failure, even if the business is profitable.