Comments

  1. Profile photo of ksaisonga says

    Hi,
    I dont really understand when you say working capital does not earn profit, investing in machinery is what is profitable. ( am looking at inventory, you paurchase and sale it brings in profit). Kindly elaborate for me please.

    • Profile photo of John Moffat says

      A manufacturing company makes profit by manufacturing goods and selling them at a higher price. The ideal situation would be to be able to sell them as soon as they were produced rather then keeping them in inventory. Keeping them in inventory does not make more profit – it means it takes longer to realise the profit, means more money lost in interest while waiting to sell them, and increases the chance of never being able to sell them (because they become obsolete etc.)

  2. avatar says

    Hi fahim how cash will be doubled automatically?john indicated in his lecture that if sales double receivables might be get doubled as you need to allow customer credit period to compete with others..That’s why to manage working capital you need to take overdraft.

  3. avatar says

    Sir,
    Could you little bit help me?
    Am I correct if I say that current liabilities financed by 200$ from long term(example 1)?
    Is a long term capital always better than overdraft?

    Thanks

    • Profile photo of John Moffat says

      No. We don’t finance current liabilities!

      In the current year, all of the finance for the company is coming from long-term capital (700) – the total borrowings (from equity and from long-term debt borrowing) is 700.

      In the next year, however, a total of 1,300 is being borrowed. 1200 is borrowed from long-term capital and 100 is borrowed short-term as overdraft.

      There is no ‘best’ way of borrowing.
      Long-term borrowings are likely to be more expensive that short-term borrowing (overdraft money is borrowed only as needed, which can mean less interest). On the other hand short-term borrowing is more risky (because the banks can insist on the overdraft being repaid at any time). (This is on pages 13 and 14 of the Lecture Notes).
      As I write in the notes (and say in the lecture), the standard ‘recommendation’ is to finance the average long-term working capital needs from long-term borrowings, and to finance short-term extra needs from short-term borrowing.

      The problem with over-trading is that the company is forced into short-term borrowing because they have not planned ahead properly.

  4. avatar says

    Hi John,

    you said to deal with the problem of overtrading you need to raise more long-term capital if i got it correct, can it be ok if we fail to raise long term capital and instead reduce or downgrade the activities of the firm?

  5. Profile photo of absylum007 says

    did i get this right ??

    overcapitalization means that i have stuck money in current asset (like inventory) or got too much current liabilities ( payables) too much which is not worthwhile and it would be betteroff in investing in long term assets like machines …..

    but i don’t get it having parables is good thing as it reduces our working capital cycle which means we cash in out faster , as payable = usually interest free source of finance

    • Profile photo of John Moffat says

      If you listen carefully to the lecture, the company should have raised more long term capital and doubled the cash balance also. However too many companies do not plan for the working capital properly and end up being forced into being overdrawn. This is what overtrading is.

  6. avatar says

    I LOVE YOU, JOHN MOFFAT…!!!!!!!!! I JUST DON’T KNOW ANY OTHER WAY TO EXPRESS MY HAPPINESS… MR. JOHN MOFFAT HAS AN EXCELLENT WAY OF MAKING US UNDERSTAND, APPRECIATE AND LOVE WHAT HE IS TEACHING… I AM SO LUCKY TO KNOW ABOUT OPENTUITION.COM, AND I AM SPREADING THE WORD TO OTHER ACCA STUDENTS THAT I KNOW OF… THANK YOU SO MUCH, OPENTUITION.COM.. TO EVERYONE IN OPENTUITION.COM, YOU ALL HAVE PLAYED A MAJOR ROLE IN MY SUCCESS IN ACCA, AND THEREFORE MY LIFE… LOVE U, ALL…!!!

Leave a Reply