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Questions and Answers
What is the formula for calculating working capital requirement?
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?
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?
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?
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?
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?
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?
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?
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?
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?
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?
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?
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?
What is the goal of working capital management?
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How does the nature of business impact the working capital requirements?
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?
Which of the following is part of a firm's working capital?
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What does net working capital equal to?
What does net working capital equal to?
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Why do wholesalers generally require more working capital?
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?
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.
