BFA103 Accounting and Financial
Decision Making

Study Manual

Week 7: Financing the Business

Overview of the week’s work:

No matter how large or small, all entities need funding. You will recall from an earlier topic
that major business activities include: setting strategies and objectives; financing activities;
investing activities and then operating activities. A major concern for all entities is the way
that the entity is financed (i.e. the financing activities).

Net working capital is defined as current assets less current liabilities. A critical financing
function is the management of working capital in an entity and in particular the maintenance
of liquidity in the entity. Critical in the management of working capital is management of
cash; accounts receivable and inventories and there are techniques that the business manager
needs to be aware of in managing these elements of working capital.

In terms of the overall financing decisions in the entity, the entity needs some principles to
guide it. The principle that is discussed in this topic is called the ‘hedging principle’ – that
is, the distinction between permanent funding; temporary funding and funding from
spontaneous sources and how the hedging principles suggests how funding from these
sources should be used.

Finance can be obtained from short term sources and long term sources and in this topic you
will learn about the finance types from these two sources.

Learning Objectives:
After studying this week’s work you should be able to:

discuss the management of net working capital

outline the issues underlying the management of cash

discuss the management of debtors

identify the issues with respect to the management of inventories

compare the sources of short-term finance

compare the sources of long-term debt finance

explain equity finance instruments...