Abstract
The component items of, and the overall position of, working capital is analysed by outside parties for credit extension, lending and investment purposes. Interested parties include:
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(1)
Trade and expense creditors who give short-term credit to the firm. They only give credit as long as they think the firm will settle the debt on the due date.
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(2)
Overdrafts and loans by banking and financial institutions. The granting of these facilities, the amounts involved, the conditions attached, the security involved and the interest rates will all depend on the institution’s opinion of the firm’s creditworthiness.
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(3)
Finance extended by credit factors. The extent of their charges will be partly dependent upon their assessment of the time it is taking debtors to pay and the bad-debts expense.
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(4)
Pledging of inventory as security for a loan. The lender will want to make an appraisal of the value of the inventory and the speed at which finished goods are being sold.
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(5)
Credit agencies. These will use analyses of published accounts as one measure in their appraisment of a firm’s creditworthiness.
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(6)
Long-term investors, including debenture holders and existing and potential shareholders. Whilst these parties are primarily interested in the long-term profitability of the firm, they are well aware that the deterioration of working capital can force otherwise profitable firms into liquidation. As mentioned in Chapter 1, many progressive, fast expanding firms have been bankrupted because of short-term liquidity problems. Existing shareholders may use the analyses to influence the management into adopting various policies; otherwise the analyses are used in helping decide whether the firm is worth investing in.
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References
E. I. Altman, ‘Financial ratios, discriminant analysis and the prediction of corporate bankruptcy’, Journal of Finance (September 1968).
C. A. Westwick, How to Use Management Ratios (Gower Press, 1973).
Statement of source and application of funds, A.S.S.C. Exposure draft, ED13 (April 1974).
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© 1976 Michael Firth
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Firth, M. (1976). The Analysis of Working-Capital Positions by Outsiders. In: Management of Working Capital. Studies in Finance and Accounting. Palgrave, London. https://doi.org/10.1007/978-1-349-15683-2_6
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DOI: https://doi.org/10.1007/978-1-349-15683-2_6
Publisher Name: Palgrave, London
Print ISBN: 978-0-333-18710-4
Online ISBN: 978-1-349-15683-2
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