1. Profile photo of ksaisonga says

    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. Profile photo of Salauddin 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

    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?


    • 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.

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