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Questions and Answers
What is the formula for calculating working capital requirement?
In the context of working capital, what does 'lag in payment of wages and overheads 2 weeks' refer to?
How does offering 'Credit allowed to debtors 6 weeks' affect working capital?
What impact does 'Credit allowed by suppliers 8 weeks' have on working capital?
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What is the purpose of 'Raw material stock Average 1 week' in the context of working capital?
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How does 'Cash required ₹50000' impact the working capital position?
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What is the main focus of inventory management in working capital management?
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Which technique is NOT commonly used in inventory management according to the text?
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Which of the following is NOT a component of cash management in working capital?
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What will be the effect on working capital if a business implements Just in Time (JIT) approach?
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Why is cash management considered the most important area of working capital management?
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Which area of working capital management deals with maintaining the optimal investment in inventories?
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What is the goal of working capital management?
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How does the nature of business impact the working capital requirements?
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Which of the following is part of a firm's working capital?
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What does net working capital equal to?
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Why do wholesalers generally require more working capital?
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Which factor affects working capital management by impacting the time period involved in production?
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Study Notes
Working Capital Calculation
- Working capital requirement is calculated by assessing current assets minus current liabilities.
Lag in Payment of Wages and Overheads
- A 'lag in payment of wages and overheads 2 weeks' indicates a delay in cash outflows, temporarily reducing immediate working capital needs.
Credit Allowed to Debtors
- Offering 'Credit allowed to debtors 6 weeks' means funds are tied up in receivables for longer, potentially increasing working capital requirements.
Credit Allowed by Suppliers
- 'Credit allowed by suppliers 8 weeks' extends the time to pay suppliers, enhancing cash flow and providing flexibility in managing working capital.
Raw Material Stock
- 'Raw material stock average 1 week' serves to ensure production continuity, impacting the amount of capital required to maintain adequate inventory levels.
Cash Requirement
- A specified 'Cash required ₹50000' directly influences working capital by establishing a clear liquidity target that must be met.
Inventory Management Focus
- The main focus of inventory management in working capital is to optimize inventory levels to align with production needs without leading to excess stock.
Non-Common Technique in Inventory Management
- A specific technique that is NOT commonly used in inventory management is identified, crucial for understanding effective inventory strategies.
Cash Management Components
- Certain elements are defined as NOT part of cash management within the scope of working capital, differentiating between cash flow activities.
Just in Time (JIT) Approach Impact
- Implementing a Just in Time (JIT) approach generally reduces working capital by minimizing inventory levels, thus decreasing cash tied up in stock.
Importance of Cash Management
- Cash management is deemed the most important area of working capital management due to its direct impact on liquidity and operational continuity.
Inventory Investment Management
- The area of working capital management focused on maintaining optimal investment in inventories is critical for efficiency and cost management.
Goal of Working Capital Management
- The primary goal of working capital management is to ensure a company can meet its short-term liabilities while maintaining operational efficiency.
Nature of Business Impact
- The nature of the business significantly influences working capital requirements, with factors like industry norms, operating cycles, and inventory levels playing key roles.
Components of Working Capital
- Identifying which elements contribute to a firm's working capital is essential for accurate financial analysis.
Net Working Capital
- Net working capital is equal to the difference between current assets and current liabilities, indicating the liquidity position of a business.
Wholesalers' Working Capital Needs
- Wholesalers generally require more working capital due to longer inventory cycles and the need to sustain larger stock levels.
Factors Affecting Working Capital Management
- Production time periods affect working capital management by influencing how long funds are tied up in materials and inventory before revenue realization.
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Description
Test your knowledge on factors influencing working capital management in businesses, including the impact of inflation and growth prospects. Understand how different scenarios affect the working capital requirements of a company.
