• YOU can help the next generation of students in the community!
    Share your trial papers and notes on our Notes & Resources page
  • Like us on facebook here

finance (1 Viewer)

Yusra366

Member
Joined
Oct 13, 2020
Messages
93
Gender
Female
HSC
2021
hey guys, just needed help with this:
so if you want to improve this businesses liquidity which TWO strategies would you use from the following:
Working capital management:
– control of current assets – cash, receivables, inventories

– control of current liabilities – payables, loans, overdrafts

– strategies – leasing, sale, and lease back
 

Attachments

jimmysmith560

Le Phénix Trilingue
Moderator
Joined
Aug 22, 2019
Messages
1,577
Location
Krak des Chevaliers
Gender
Male
HSC
2019
Uni Grad
2022
Some insight and analysis I can provide:

This business had $50,000 in total current liabilities in 2019, compared to $102,000 total current liabilities in 2020, which is just over a double increase from 2019 to 2020. This means that this business now has to pay double the amount of money to meet its short term commitments in 2020 than that of 2019. This can be problematic because a business must ensure that it is regularly seeking to reduce expenses, including current liabilities and this business is obviously not doing well at that given its total current liabilities for 2020.

This business also had $104,000 in total current assets in 2019 compared to $87,000 in total current assets in 2020 which represents a $17,000 decrease in current assets. This is not favourable for the business and is detrimental to its liquidity.

To increase their current assets (mainly cash), the business is able to use sale and lease back to sell some of its assets and then lease them back, which creates an immediate positive cash flow (immediate injection of cash) for the business, hence improving their liquidity, and at the same time allows the business to retain and use the assets that were sold.

In more technical terms: The biggest advantage of sale and lease-back is that it helps improve a business’s liquidity since it enables the business to receive a large cash injection from the sale of the asset, which can then be used as working capital if the business is experiencing a cash shortfall (which this business is obviously experiencing, given the figures).

You can also suggest and elaborate on leasing as a strategy to improve working capital. The main advantages of leasing with respect to working capital include:

- The cash outflows (payments) related to leasing are spread over several years as opposed to the one-off large initial cash outflow that would occur if the business had to purchase the asset outright. This helps improve working capital.
- Lease payments are considered operating expenses and are therefore tax-deductible.


I hope this helps :D
 

Yusra366

Member
Joined
Oct 13, 2020
Messages
93
Gender
Female
HSC
2021
Some insight and analysis I can provide:

This business had $50,000 in total current liabilities in 2019, compared to $102,000 total current liabilities in 2020, which is just over a double increase from 2019 to 2020. This means that this business now has to pay double the amount of money to meet its short term commitments in 2020 than that of 2019. This can be problematic because a business must ensure that it is regularly seeking to reduce expenses, including current liabilities and this business is obviously not doing well at that given its total current liabilities for 2020.

This business also had $104,000 in total current assets in 2019 compared to $87,000 in total current assets in 2020 which represents a $17,000 decrease in current assets. This is not favourable for the business and is detrimental to its liquidity.

To increase their current assets (mainly cash), the business is able to use sale and lease back to sell some of its assets and then lease them back, which creates an immediate positive cash flow (immediate injection of cash) for the business, hence improving their liquidity, and at the same time allows the business to retain and use the assets that were sold.

In more technical terms: The biggest advantage of sale and lease-back is that it helps improve a business’s liquidity since it enables the business to receive a large cash injection from the sale of the asset, which can then be used as working capital if the business is experiencing a cash shortfall (which this business is obviously experiencing, given the figures).

You can also suggest and elaborate on leasing as a strategy to improve working capital. The main advantages of leasing with respect to working capital include:

- The cash outflows (payments) related to leasing are spread over several years as opposed to the one-off large initial cash outflow that would occur if the business had to purchase the asset outright. This helps improve working capital.
- Lease payments are considered operating expenses and are therefore tax-deductible.


I hope this helps :D
Some insight and analysis I can provide:

This business had $50,000 in total current liabilities in 2019, compared to $102,000 total current liabilities in 2020, which is just over a double increase from 2019 to 2020. This means that this business now has to pay double the amount of money to meet its short term commitments in 2020 than that of 2019. This can be problematic because a business must ensure that it is regularly seeking to reduce expenses, including current liabilities and this business is obviously not doing well at that given its total current liabilities for 2020.

This business also had $104,000 in total current assets in 2019 compared to $87,000 in total current assets in 2020 which represents a $17,000 decrease in current assets. This is not favourable for the business and is detrimental to its liquidity.

To increase their current assets (mainly cash), the business is able to use sale and lease back to sell some of its assets and then lease them back, which creates an immediate positive cash flow (immediate injection of cash) for the business, hence improving their liquidity, and at the same time allows the business to retain and use the assets that were sold.

In more technical terms: The biggest advantage of sale and lease-back is that it helps improve a business’s liquidity since it enables the business to receive a large cash injection from the sale of the asset, which can then be used as working capital if the business is experiencing a cash shortfall (which this business is obviously experiencing, given the figures).

You can also suggest and elaborate on leasing as a strategy to improve working capital. The main advantages of leasing with respect to working capital include:

- The cash outflows (payments) related to leasing are spread over several years as opposed to the one-off large initial cash outflow that would occur if the business had to purchase the asset outright. This helps improve working capital.
- Lease payments are considered operating expenses and are therefore tax-deductible.


I hope this helps :D
wow this helped me so much thank you!
Also wanted to ask that for this business the owner is concerned with purchasing goods from unknown suppliers and is using global sourcing to purchase inputs from China. So which method of international payment from below should he use and why?
- clean payment
- letter of credit
- payment in advance
- bill of exchange:
• document against payment
• document against acceptance
 

jimmysmith560

Le Phénix Trilingue
Moderator
Joined
Aug 22, 2019
Messages
1,577
Location
Krak des Chevaliers
Gender
Male
HSC
2019
Uni Grad
2022
wow this helped me so much thank you!
Also wanted to ask that for this business the owner is concerned with purchasing goods from unknown suppliers and is using global sourcing to purchase inputs from China. So which method of international payment from below should he use and why?
- clean payment
- letter of credit
- payment in advance
- bill of exchange:
• document against payment
• document against acceptance
No worries!

The riskiest method of payment to the exporter (the Chinese business) would be a clean payment. Based on this, clean payment would be the best/safest method of payment to be used by the importer (the business owner).

Clean payment occurs when the goods are shipped and received before the importer pays for them, which reduces risk. The risk to the importer is minimised as it allows them to inspect the goods for quality and quantity prior to payment.
 

Yusra366

Member
Joined
Oct 13, 2020
Messages
93
Gender
Female
HSC
2021
No worries!

The riskiest method of payment to the exporter (the Chinese business) would be a clean payment. Based on this, clean payment would be the best/safest method of payment to be used by the importer (the business owner).

Clean payment occurs when the goods are shipped and received before the importer pays for them, which reduces risk. The risk to the importer is minimised as it allows them to inspect the goods for quality and quantity prior to payment.
wow I can't thank you enough! you have been of great help, really appreciate it!!!
 

Users Who Are Viewing This Thread (Users: 0, Guests: 1)

Top