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A. Read the text, ignoring the missing parts.
The greater the proportion of long-term debt, …(1)… . This is connected with making decisions about the gearing of the company.
When a company is said to be “high geared”, the level of borrowing is high when compared to its ordinary share capital. A lowly-geared company has borrowings which are relatively low. High gearing has the effect of increasing a company’s profitability when the company’s trading is expanding; if it slows down, …(2)… . There will also be a drop in profits if working capital is raised without a corresponding rise in production or margins.
We can distinguish between permanent and temporary working capital. …(3)… . The temporary working capital is usually serviced from an overdraft facility.
Inventories (raw materials, work in progress and finished goods) are part and parcel of working capital. …(4)… . It is the job of financial manager to minimize the stocks of raw materials, the level of the work in progress and the quantity of finished goods. His task is also to see that generous credit terms are negotiated with suppliers but minimal credit is offered to customers. …(5)… . A balance must be achieved between getting and giving good credit terms …(6)… .
Another thing is that adequate cash should always be available for meeting the company’s day-to-day debts and …(7)… . The expected cash flows that will result from potential investment projects should be measured carefully.
b. Look at the missing parts A-H and fit them in the gaps. There is one extra you don’t need.
| A | The former keeps the business flowing throughout the year, while the latter is needed from time to time to take account of seasoned, cyclical or unexpected fluctuations in the business. |
| B | In the UK a public company raises its capital by inviting the public to take up shares. |
| C | there should always be a reserve on hand to meet contingencies |
| D | the more exposed the company is in times of economic difficulty |
| E | If inventories are not well managed there will be an enormous amount of excess working capital |
| F | in order to attract customers and maintain positive relationships on the one hand, and minimizing cash outlay on the other hand |
| G | then the high interest charges associated with gearing will increase the rate of slowdown |
| H | It is often referred to as the debtor side, because working capital is required to finance the gap between payment due to suppliers and payment owed by customers |
| D |
c. Complete the chart and elaborate upon the uses of working capital:
| Working capital permanent / a. ___________ | |||||
| inventories | debtors | cash | |||
| b. _____ | c.______ | d. ____ | e. _______ | contingencies | |
d. Discuss the ways of funding the business. Make a full use of the chart below:
| Source of funds | Advantages / disadvantages | |
| Low gearing | Owner’s capital | Most exposed but claim on all profits |
| Venture capital | Demand very high rate of return but doesn’t interfere in company | |
| Unlisted securities market | Outside investors, no loss of control | |
| Stock exchange | Long-term solution to raising money 25% in public hands therefore less control | |
| High gearing | Long-term loans from banks and pension funds | Secured over fixed assets Better return on net profits in prosperous times High interest payments in difficult times |
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