Accounting, 3rd Edition

Chapter 22

The management of working capital and sources of finance

‘It doesn't take very long to screw up a company. Two, three months should do it. All it takes is some excess inventory, some negligence in collecting, and some ignorance about where you are.’

Source: Mary Baechler in Inc., October (1994) quoted in The Wiley Book of Business Quotations (1998), p. 86.

Learning Outcomes

After completing this chapter you should be able to:

• Explain the nature and importance of sources of finance.
• Discuss the nature of short-term financing.
• Analyse the ways in which the long-term finance of a company may be provided.
• Understand the concept of the cost of capital.

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Chapter Summary

• Sources of finance are vital to the survival and growth of a business.
• There are internally and externally generated sources of finance.
• Sources of finance can be short-term or long-term.
• Short-term and long-term sources of finance are normally matched with current assets and long-term, infrastructure assets, respectively.
• Short-term internal sources of finance concern the more efficient use of cash, trade receivables and inventory.
• Techniques for the internal management of working capital involve the trade receivables ...