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Hello sir. In the lectures you said that it is the non current assets that are making the profit by which I assumed you meant the factory machines. But this only true for business that are manufacturing/producing goods. What about business that make their profits from simple trading with no production involved? Wouldn’t it be better for these businesses to have a higher working capital?
All businesses need to control their level of working capital. The working capital is not actually earning profits for the company and so they would be better to reduce it and use the money to expand the business (maybe by buying more machines if they are a manufacturing company, or (for example) doing more advertising if they are not a manufacturing company).
If they have nowhere to invest and expand the company they should still keep their working capital low and use the cash saved to pay a higher dividend to shareholders 🙂Sir, how is the working capital not earning profits? The inventory is sold to earn profits and some of the profits come in receivables and some in direct cash. These profits can then be used to expand the business and also to pay dividends.
Also, if it’s not a manufacturing company what type of non-current assets might they invest in to earn profits?
Holding inventory does not earn profit. Profit is made then the goods are sold. Although most manufacturing businesses will need to hold some inventory in order to make sure that they can always supply customers, they do not want to hold more than is needed. The more inventory they hold the more it is costing them (in terms of storage cost and, more importantly, tying up cash in inventory that could be used instead to expand the business by, for example, buying more machines).
Both manufacturing and non-manufacturing companies will have receivables (assuming they sell on credit) and cash. They need both to keep the business running properly, but again they want to keep them as low as possible by collecting receivables as fast as possible and using excess cash to either expand the business or to pay off any borrowings.
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