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Pearson Education Management Accounting for Decision Makers_13

Tham khảo tài liệu 'pearson education management accounting for decision makers_13', tài chính - ngân hàng, kế toán - kiểm toán phục vụ nhu cầu học tập, nghiên cứu và làm việc hiệu quả | 432 CHAPTER 11 MANAGING WORKING CAPITAL Activity 11.7 Why do you think a business may decide to hold at least some of its assets in the form of cash Hint There are broadly three reasons. The three reasons are 1 To meet day-to-day commitments a business requires a certain amount of cash. Payments for wages overhead expenses goods purchased and so on must be made at the due dates. Cash has been described as the lifeblood of a business. Unless it circulates through the business and is available for the payment of claims as they become due the survival of the business will be at risk. Profitability is not enough a business must have sufficient cash to pay its debts when they fall due. 2 If future cash flows are uncertain for any reason it would be prudent to hold a balance of cash. For example a major customer that owes a large sum to the business may be in financial difficulties. Given this situation the business can retain its capacity to meet its obligations by holding a cash balance. Similarly if there is some uncertainty concerning future outlays a cash balance will be required. 3 A business may decide to hold cash to put itself in a position to exploit profitable opportunities as and when they arise. For example by holding cash a business may be able to acquire a competitor s business that suddenly becomes available at an attractive price. How much cash should be held Although cash can be held for each of the reasons identified doing so may not always be necessary. If a business is able to borrow quickly the amount of cash it needs to hold can be reduced. Similarly if the business holds assets that can easily be converted to cash for example marketable securities such as shares in Stock Exchange listed businesses or government bonds the amount of cash held can be reduced. The decision as to how much cash a particular business should hold is a difficult one. Different businesses will have different views on the subject. Activity 11.8 What do you think are the .