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Dear Sir
I cannot believe interest rate management is more important than dividend policy. interest rates are usually set by others and the best management you have is pleading to the bank. dividend policy is deciding what % of earnings you are going to pay out to shareholders and what reserves you will be left with etc etc etc
The level of dividend is dictated by how much cash the business has available, and although cash is part of working capital it is not the reason for managing working capital well (which is what the question is asking about).
With regard to interest rate management – things may be different in your country, but in the UK, ‘pleading to the bank’ will not result in different interest rates!! By managing the level of cash (or the level of the overdraft) the business is able to manage the interest receivable or payable.
(And do note that this is not a question ‘invented’ by BPP – it was set in the real September 2016 Paper F9 exam.)
Hi
I accept your answer, but let’s be fair, the interest rate management you are talking about is debt managment. In our country the Government sets the interest rate and the banks give most companies repo plus 1 or 2. But I see the point on the question asking for “working capital”….I missed that
For long-term borrowing and depositing it is essentially the same in the UK (except that the Bank of England sets the interest rate independently of the government).
However in the context of working capital, we are looking at short-term deposits and overdraft borrowing. The management of cash (and therefore the interest receivable or payable) is an important part of working capital management (think about Miller Orr for example) 🙂
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