Business should use Capital analysis by:
Knowledge of cash inflow and out flow is crucial-need to know debtor days and creditors days and stock days on hand is important as this is the driver of the cash cycle.
The flow of cash is more important to a short term lender
Cash is readily available and will be used for lending purposes immediately.
In today's business is impossible to operate without current liabilities as:
a)Most businesses like to be offered credit days, which affects the sellers cash flow and in most cases a financial institution will come in to bridge the gap by way of short term overdrafts all other facilities.
b) Mostly big buyers prefer to pay by cheques.This will take time to clear hence need to have some financial support as the cheques clear as more goods need to me purchased in the mean time.
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