Working capital - the liquidity question

Considering the Business Model Figure, it can be seen that money is continually moving through Circles 4, 5, 6, 7 and 8 back into cash, and that in the middle, represented by Cir­cle 9, there is a need to pay the creditors - the bills, as and when they become due.

It is this need to pay bills as and when they are due that forms the first vital question that has to be asked when working capital is being considered - the liquidity ques­tion, as it is called.

After all if a business cannot pay its bills as and when they become due from the money flowing out of the working capital area, the business will, if its creditors press for payment, have only two courses of action either of which will adversely affect its profitability.

a) TO SELL OFF ITS FIXED ASSETS, which it had no intention of selling and if it does so is likely to do so at a loss, or

b) TO OBTAIN A LOAN IN A HURRY - which is never a good thing to have to do! Lenders often recognize the urgency and consequently raise the cost borrowing, the interest rates.

Practicce

Элементы оборотных средств	Предприятие 1	Предприятие 2
Сумма, млн руб.	Структура, %	Сумма, млн руб.	Струк-тура, %
Производственные запасы	94,70	27,0	94,92	43,1
Незавершенное производство	16,15	4,7	27,64	12,6
Расходы будущих периодов	134,15	38,3	5,32	2,4
Готовая продукция	17,65	5,0	30,02	13,7
Прочие	87,35	25,0	62,1	28,2
Итого

From our calculation we can see that the second plant is more resource than first. But at the same time the first plant has to invest more money in prepaid expenses. A higher proportion of work in progress may indicate a longer duration of the production cycle or greater value of the feedstock or materials. Combined with a large proportion of the finished product is suggesting that the second company likely is among those that manufacture products with a higher added value.

Problem 1

B

	FC	TC	SALES

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