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sir I did not understand on long term average working capital (WC) and short term fluctuations.
long term average WC= permanent WC and short term fluctuations= temporary WC . what does it mean?
Firstly, why have you headed this post ‘overtrading’, because what you are asking has nothing to do with overtrading! 🙂
Secondly, have you watched our free lectures on this (together with our free lecture notes) because this is explained there!
Working capital needs financing, but the level of working capital is going to change from day-to-day (as we make more purchases on credit, more sales on credit, etc.).
It would make sense for the long-term average level of working capital to be financed from long-term borrowing, and for any day-to-day extra needs to be financed from short-term borrowing (i.e. overdraft). The business does not want more long-term borrowing than they really need.
Again, for more detail you really should read our lecture notes and watch the free lectures that go with them.
(Our free lectures are a complete course for Paper F9 and cover everything needed to be able to pass the exam well.)
I forgot to edit that heading 😀
yes sir I have watched the lectures but somewhere between I can not catch your accent .
”It would make sense for the long-term average level of working capital to be financed from long-term borrowing” this is what I was confused about.. regarding short term activities i am cleared .
sir working capital means CA-CL. so that ”long term average of working capital” means what?
If the level of working capital were always fluctuating between 20 and 40, then the average would be (20 + 40) / 2 = 30.
So in the long-term they will always have on average, working capital of 30 and it would make sense therefore to finance 30 from long-term finance.
Obviously calculating the average in practice will not be as simple, but you are not asked calculations on it – you can just be asked to explain the financing aspect.
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