Why is It Called Working Capital?

Why is It Called Working Capital?

It is not an exaggeration to say that working capital management is one of the most important aspects of any business. If a company has insufficient working capital, it runs the risk of being forced into bankruptcy or unable to grow. Yet if it has too much, it can be seen as a sign of weakness and lose customers looking for companies with more liquidity. It’s no easy task managing these tricky balances, but there are steps you can take to make sure your company stays healthy and prosperous. Here is why Why it is Called Working Capital.

Cover Unexpected Costs

Many people use their working capital for day-to-day operations. They will use their account to order a new shipment of parts, buy a new machine, or hire extra employees if needed. But this isn’t the only reason you might need to dip into your account. If you are running a seasonal business, like an ice cream shop, you might need to make last-minute purchases or pay overtime if droughts hit the area and fewer customers come out in the hot weather. These unexpected costs are the most likely to occur, so you should ensure they are accounted for in your budget.

Why is It Called Working Capital?

Invest in New Projects

Another reason to keep a healthy amount of working capital is to use it for a new project or for capital investments that could be profitable down the road. You might want to buy a new piece of equipment, pay for renovations at your office, or buy or hire more employees. Even if the project doesn’t succeed immediately, you need to make sure you have enough money in the reserve to keep the doors open until it does. It would help if you had a contingency plan for these situations.

Pay Off Debts

Not all debts are bad. A mortgage or business loan can be suitable for your long-term savings if it allows you to buy something that will give your company a boost in the future. However, some of your debts are probably for bad purchases or to cover overspending. To avoid costly interest payments, you must pay those off as soon as possible. If your company is spending too much, set a budget limiting how much you can pay using credit, and stick to it!

Build Up a Buffer for Emergencies

Finally, a successful working capital management plan should include an emergency fund. An unnatural disaster such as a hurricane or a terrorist attack can shut down all normal business functions. Your employees will need to be compensated for lost wages and overtime when that happens. This can be expensive if the money is unavailable, so it’s wise to have an emergency fund if these problems arise.

Future Planning

Work out a budget for each year and work to stay within it. Consider ways to spend less or make more money by growing your business, and include these plans in your working capital management process. Also, if you have a large debt, consider paying it off as soon as possible. If you save up enough cash, use this reserve to manage your company’s working capital more effectively.

Why is It Called Working Capital?

Theft Protection

If your working capital is stolen, it is gone for good. However, if you have an emergency fund, you can use that money to pay employees during a crisis and keep the company alive until you can save up enough cash again. Consider saving some of your wages or profits in an account that requires two signatures from two different people to access funds. This way, even if one person steals the money, you will still have another person who can take their place and keep the business running smoothly.

The Cost of Wasting Cash

Do you pay in cash or by check? If you pay in money, someone else must deposit it for you and put it through the system. This process will probably cost a few dollars, and it’s also an inconvenience for your employees if they waste time and gas going to the bank. However, some people use checks and other forms of payment that can carry their own fees, so be sure to compare shops before deciding what is best for your company.


A working capital management plan can help you achieve your financial goals and keep your company profitable. By paying attention to and managing these issues, you will be able to boost the long-term growth of your business.

When You File Bankruptcy Who Pays the Debt?

When You File Bankruptcy Who Pays the Debt?

This is a common question people ask themselves when financially broke. The answer is not straightforward and depends on which type of bankruptcy you filed and how much debt you had. Let’s take a closer look at which debts are paid by the creditors or discharged in bankruptcy. Also, we will see which debts are not removed and who pays for them.

When You File Bankruptcy Who Pays the Debt?

Here Are the Various Types of Bankruptcies;

1. Liquidation

The court appoints a trustee in bankruptcy to liquidate the assets. The trustee then pays the creditors with the remaining cash. Sometimes, creditors may get some payments beyond what is needed to pay their debts, claiming they are not owed. When this happens, it is called “claims against equity.”

2. Family Farmers

Farmers who file for bankruptcy under bankruptcy law can keep a certain amount of property. Some wits charge this amount as “federal taxes .”This is because the compensation for an asset after bankruptcy is called federal taxes.

3. Large Reorganization

Large businesses often have large debts. Creditors and debtors work together to reorganize their debts. Dischargeable debts are written in a court agreement called the “Plan of Reorganization .”Also, the creditor or the debtor may negotiate a payment plan.

4. Municipalities

Creditors may declare bankruptcy due to bad management. In this type of bankruptcy, a portion of the property is distributed to the creditors, and the debt is repaid with a fixed sum over time. Such cases are entitled to “conversion” and are treated as a reorganization.

5. Individuals

In this type of bankruptcy, the individual’s possessions are distributed to creditors for repayment of debts. In contrast, assets are divided into two groups: investments with a high value and a low value. Assets with a high value must be sold by the trustee, who pays the creditors with the money obtained from selling these assets.

6. Repayment Plan

When a debtor gets back on its feet, it may file a repayment plan with the court. Creating a repayment plan allows debtors to repay creditors in installments. Creditors are not likely to be angry because they will receive their money back, and they can get more money than they usually get in bankruptcy proceedings.

When You File Bankruptcy Who Pays the Debt?

Here Is What Happens When You File Bankruptcy Who Pays the Debt;

1. Tax Debts in Bankruptcy

The tax authority never wipes out your tax debts when you file for bankruptcy. If you can’t pay off your tax debts, you must arrange with the tax authority to pay a portion of the debt through a payment or installment plan. When you file bankruptcy, it doesn’t mean you owe less tax; you don’t have to repay them through taxes anymore. You will still be responsible for paying all your tax obligations even if the bankruptcy is successful.

2. Student Loans in Bankruptcy

If you have student loans in default, the lender is unlikely to forgive them. However, there are provisions to mitigate this situation and make it easier to clear up your debt. For example, you can opt for a discharge so that your student loans will not appear on your credit report when you file for bankruptcy, but this only works for certain federal loans. You need a personal hardship provision and a waiver for private student loans.

3. Credit Cards in Bankruptcy

Most of the time, creditors will not forgive debt in bankruptcy. However, there are situations where the basic rules do not apply. Suppose you have a specific type of debt, such as medical bills and credit card debt. In that case, you may be able to place a “PAYE” or “Pay as you Earn” order with your creditors so that your creditors will stop charging you interest payments on assets that are exempt from bankruptcy.

4. Auto Loans and Mortgage Debt in Bankruptcy

When you file for Chapter 7 bankruptcy, all of your secured debts are typically discharged. For example, if you have a car loan or you have taken out a home mortgage, there is a chance that both your car lender and your home mortgage lender will give up their claim to the collateral.

5. Property Taxes and Governmental Debts in Bankruptcy

Most of the time, property taxes and governmental debts are exempt from discharge in bankruptcy. This is because the debtor will pay the same creditor through taxes, fines, penalties, and assessments. These debts may be included in default if the debtor can prove to a judge that they are repaying other debts through taxes, fines, penalties, and assessment.

6. Unsecured Debt in Bankruptcy

When you file for bankruptcy, the creditor (whether a bank or a credit card company) must give you the information they hold on the debt. This means that if they have a copy of your account statement or they can prove to the court that you owe them money, that debt will not be dischargeable in bankruptcy.

Final Verdict

Filling for bankruptcy is not easy and also not cost-free. You should be aware of the legal requirements and be prepared to face the creditors and negotiate a repayment plan with them. But remember that some debts are not dischargeable in any bankruptcy case, and you will have to pay for them.

What is Stock Dividend Example?

What is Stock Dividend Example?

A stock dividend is a form of equity distribution in which the company’s profits are paid as a stock dividend to its shareholders. The company distributes dividends on its earnings after paying all costs and expenses, such as compensation payments and capital expenditures.

Stock dividends are taxable income to the shareholder at the ordinary tax rates since they are considered regular income rather than capital gains or dividends. The value of a stock dividend is determined by how much income it generates for a given amount of risk taken.

What is Meant by Dividend Policies?

Examples of Stock Dividend

1. A company’s board of directors declares one dividend for each company’s outstanding share. One shares dividend that has been paid out will reduce the number of existing shares by a specific proportion.

2. A company’s board of directors issues one right per outstanding share, which entitles the shareholders to buy a new share at the exact cost of an existing share. These rights are called right shares or “shares by call.”

3. A company’s board of directors issues bonds with a cash payout at maturity equivalent to a stock dividend on each outstanding bond that has been paid out, reducing the number of bonds due in a specific proportion.

4. A company’s board of directors reinvests surplus cash into the company by issuing preferred shares with a dividend rate equal to the prime rate.

5. A company’s board of directors reinvests surplus cash into the company by issuing bonds with a cash payout at maturity equivalent to the prime rate.

6. A company’s board of directors reinvests surplus cash into the company by acquiring another business and issuing new stock in proportion to that business’s earnings before interest and tax.

7. A company’s board of directors reinvests surplus cash into the company by acquiring another business and issuing a new debt instrument with a maturity date equal to that of the most recently published debt, an interest rate equivalent to the prime rate, and an option for early repayment. No dividend is declared during the term of this new debt, but additional new debt is issued after five years at a lower interest rate based on a lower interest rate.

What is Stock Dividend Example?

Benefits of Stock Dividend

1. Hedge against inflation- A stock dividend is a form of inflation hedging. It reduces your overall risk on investment. When inflation increases, the value of a stock will also increase, and vice versa. If the value of a stock decreases, the company can reduce its outstanding shares accordingly.

2. growth potential- Some investors believe that gains from investing in the “undervalued” companies would be better than their potential losses from investing in other sectors, significantly when their sources of cash flow have been compromised by poor management or overleverage.

3. Opportunity to invest in high-growth companies – Several small and medium-sized companies are struggling financially but have tremendous potential for growth. They can offer investors extraordinary opportunities, including capital appreciation and residual income from their free cash flow.

4. Preferential tax treatment- The stock dividend is given preferential tax treatment as it is not included in the cost basis of the shares. The cost basis may be defined as the fair market value of the shares at the time of the transaction (potential profit).

5. Stock dividend is not taxable-If a stock is held for more than one year, and there is no indication of an active market for the store, the gain on the sale of a stock received as a stock dividend will not be taxable. However, if there are indications that the company’s shares are actively traded in an open market, then gains from selling any stock dividends will be subject to capital gains tax.

6. Payback on a tax-deferred basis- A stock dividend should be included in the amount of a shareholder’s cost basis in their shares held for at least one year (or 120 days). This will result in a reduction in taxable income. If for some reason, a stock dividend is not included in the cost basis and is included in taxable income, then the total amount will be subject to tax.

7. Potential for capital gains- The stock dividend can be turned into capital gains or dividends if sold after 12 months (4 months for special bonuses). If the business has been inactive for a more extended period, this may indicate potential losses from operations and may warrant further investigation.

8. Preferred stock dividends can be better-The dividends will be deferred at least until the preferred shares are converted. The dividend amount will be included in your cost basis when the stakes are converted to common stock, reducing your tax liability. If you sell the shares before they are converted, you will have to pay income tax on that dividend portion. Some investors may prefer this form of payment over a cash distribution because it reduces their current taxable income on a dollar-for-dollar basis.

Stock dividends can potentially increase financial security when invested in the right company. The shares are valued in liquid markets and can be distributed to shareholders without paying capital gains tax. Stock dividends can also be used for income protection. Stock dividends have a higher return on investment than an equity mutual fund and have an opportunity for growth due to low risk. However, this is conditional on being diversified.

What is Meant by Dividend Policies?

What is Meant by Dividend Policies?

A dividend policy is a policy a company uses to structure the distribution of its earnings to shareholders. There are various types of dividend policies, including unconditional and conditional dividends. When a company’s board of directors declares a total dividend policy, it must pay a certain percentage of its earnings to its shareholders. A set number is not given, but typically it is between 10 and 40 percent. If a company declares a conditional dividend policy, the board of directors will have to evaluate certain conditions before issuing dividends, such as profitability and the performance of other investments.

1. Who Dividend Policies Works Best For

Dividend policies work best for companies that can promise consistent dividends because the policies are a way to increase shareholder value. A company that issues an unconditional dividend policy shares its profits with its shareholders, which are essentially guaranteed. A company with a conditional dividend policy is more likely to share profits with its shareholders when they do well. Still, it also has the option not to share profits if another investment performs better than expected. Companies should also adopt dividend policies if they want to attract private equity funding or other assets.

What is Meant by Dividend Policies?

2. The Conditional Dividend Policy

While the conditional dividend policy is not necessarily meant to be permanent, it gives investors an option they did not have before. It allows them to avoid paying excessive management fees and transaction costs by holding onto their investments until they have a significant enough profit to distribute. The conditional dividend policy may work best for companies that are doing well overall but are experiencing an isolated setback in one of their investments. If a company has a limited amount of investors, it may be better to offer conditional dividends because those investors can take the tips and reinvest them elsewhere.

3. The Unconditional Dividend Policy

An unconditional dividend policy is offered when a company wants to share all of its profits with its shareholders. These are the most common policies. Investors can hold onto their shares or sell them to another party without paying management fees or other costs for offering the investment. Companies that set up an unconditional dividend policy can also use this to attract additional financial backers and hopefully encourage more investors to participate in their projects or business ventures. It is essential for companies that do not offer an unconditional dividend policy not to act as if investors can never expect dividends.

4. The Dividend Policy Changes

The company that issues an unconditional dividend policy is not obligated to continue the policy forever. Generally, if a company intends to change its dividend policy in the future, it will make a public announcement beforehand. However, if a company were to stop paying dividends after announcing that it would pay dividend payments in the future, then it would be unreasonable for shareholders to expect future rewards.

5. A Dividend Policy Example

Suppose a company wants to attract investors and other backers. In that case, it may want to set up a conditional dividend policy that will allow it to continue paying dividends at some point in the future. Such policies can be set up so that when profits are distributed, they will not exceed 40 percent of the company’s net earnings. Additionally, if that policy were implemented on January 1st, it would not take effect until after March 31st. This would allow investors who had already invested their money with the company to sell their stock before they could be affected by the policy.

What is Meant by Dividend Policies?

6. Advantages of Dividend Policy

A company’s strategy and how it is managed is a key elements of its success. To build shareholder value, a company will set aside a portion of its surplus cash flow as dividends instead of investing that cash flow in projects or ventures that may not guarantee any return. This dividend policy gives investors more certainty about the future and can help them decide how best to use their investment for the future. With a dividend policy, shareholders know they will receive a certain amount of cash as an annual dividend. This dividend can help determine how the company should manage its future investments.

7. Advantages for Investors

When a company issues dividends, it usually does so to help bolster its earnings and increase its value. By issuing dividends, companies are essentially selling stock in their company to investors, which can help raise the price of their shares on the market. Therefore, if you hold onto your shares, expect to see your stock price grow over time because of this increased value you have received from holding onto your claims instead of selling them off.

Companies that issue dividends typically do so because they want to share their profits with the shareholders. This can help increase shareholder value and create more investor confidence in the company. Investors will also hold onto their shares longer if they are given the expectation that they will eventually receive a dividend payment. To encourage investors to hold onto their shares longer, dividends can also be increased over time. This additional income can also result in a higher price for your shares on the market, which means higher returns for you in the long run.

Read micnepal.org for Financial Features

Let’s not mince words here. Financial literacy is one of the most important things you can learn. At micnepal.org, it’s our mission to help you get and use that literacy. As you can see, we are at the beginning of a new venture here at our website. Still designing…still deciding on the order we should present this new material.

Should we start with the idea that readers already have a general idea as to where they are in their ability to support their families? Or, should we begin with the thought that everyone needs to start somewhere, and address beginner level fiscal education?

Put it this way. If you are a younger reader (by younger, I say, 20s and maybe early 30s), how did you learn how to balance a checkbook? How did you learn how to apply for credit? There is a lot that isn’t taught in school or even by parents when it comes to handling money. We will work on providing financial posts that can be of help to everyone, and we thank you for reading.