MGSB22H3 Lecture Notes - Lecture 7: Cash Flow, Working Capital, Accounts Receivable
Document Summary
Why businesses fail primarily, too much debt failure to make pmts is one cause of business bankruptcy. Can arise at the outset if poor financial structure leaves founder too much debt relative to equity, arise later when biz has to borrow to cover expenses, or function of inexperienced management or poor planning. If the firm raise too little money by underestimating biz" needs => firm will be undercapitalized who may run out of cash, borrowing capacity & ability to raise additional equity. Sufficient working capital is vital to survival of enterprise & well-managed wc + cf can significantly increase profitability of the new venture. 2 components: permanent wc amount needed to produce goods/services at the lowest point of demand. Its form may change over course of cash flow cycle (i. e from inventory to receivables to cash), but permanent wc never leaves the business. As firm grows & sales increase, amt of permanent wc increases.