Question

If you were being interviewed and you were a Controller of an organization how would you answer the following questions?

What is your main role or task when analyzing working capital. Does your organization lease any of their property or equipment? If so, please give examples of what is being leasing.

What is the advantages and disadvantages of leasing?

Answer 1

Working capital:

This is the capital required for day-to-day operation of a firm. Such amount is the difference of current assets and current liabilities. Inventory is a huge part in working capital. Sometimes short-term finances are required for inventory purchase.

Role: My role is to keep working capital healthy. The ratio of current assets to current liabilities indicates working capital ratio, which should be near 2 always. This could be done if there is the minimum short-term loan. At the time of rising price of material, I should follow LIFO method of pricing, since it gives quick recovery of money through sale and there may not be necessary of taking loan of purchasing materials in future.

Leasing:

Yeas; there is a leasing.

An automated machine, which is very costly, is being leased.

Advantages:

(1) It helps to prevent unnecessary blockage of money - since the machine is expensive, the purchasing of it would be spending too much at one time.

(2) There is no risk of obsolescence – since there is no ownership right on the machine that one could be returned once obsolete.

Disadvantages:

(1)Non-ownership on the property – this might be a loss since lots of payments are done over the years but still there is no ownership right.

(2) This is treated as a loan since the payment is regular; it obstructs other loans to come, because of crossing the available limit.