Working Capital and Debtor Management: Exercises by Bookboon.com

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My friend thought “buy to let” property represented a sound investment. So, from each month’s revenue throughout the first year, he committed all maximum free cash inflow to purchasing and refurbishing a small flat in the student quarter of the city. By the end of the following January, the property was rented to students he knew from his old degree course who also frequented the market stall. Thereafter, his grand design was to acquire further properties from his increasing stock of wealth. Just like a game of Monopoly!

The accounting convention that firms should strive to maintain a 2:1 working capital ratio underpinned by a liquidity ratio of 1:1 may be sub-optimal and misleading. • Management’s objective should be to maximise current liabilities and minimise current assets compatible with their debt paying ability, based upon future cash profitability. In an ideal world all firms would prefer to hold no inventory, sell everything for cash on delivery (COD) rather than credit and not leave the balance lying idle.

Com 37 Working Capital And Strategic Debtor Management: Exercises The Working Capital Cycle and Operating Efficiency The financial details were as follows: • On January 1st he signed an open-ended monthly agreement to purchase imperfect shoes from a local manufacturer for £10,000 on three months credit. • He then occupied part of his sister’s market stall in the city centre (who sold second-hand designer clothes) for two days a week, free of charge. • At the end of each month he hoped to sell everything at a 50% mark-up (well below High Street prices) cash up front.

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