PPT 11

Question 1

Working Capital Formula

Answer 1

Working Capital = Current Assets – Current Liabilities

Current Assets: Cash & Bank Balances, Bills Receivable, Inventory
Current Liabilities: Creditors, Bills Payable

Question 2

Working Capital Management

Answer 2

Managing Working Capital involves:

Estimation of Requirement
Procurement of Funds to meet needs

Question 3

Factors Determining Working Capital Requirement

Answer 3

Operating Cycle
Sales Volume
Seasonality
Cyclical Factors
Nature of Business
Terms of Credit
Inventory Turnover
Technology
Contingency Plans

Question 4

Operating Cycle and Working Capital

Answer 4

The operating cycle is the time for cash to be reconverted into cash through processes.

Long Operating Cycle → More working capital needed
Short Operating Cycle → Less working capital needed

Question 5

Impact of Seasonality on Working Capital

Answer 5

Peak Season: Shorter Cash-to-Cash Cycle, less working capital needed
Off Season: Longer Cash-to-Cash Cycle, more working capital needed

Question 6

Factors in Estimating Working Capital Requirement

Answer 6

Cost of Raw Material
Time for Raw Materials to enter production
Length of Production Cycle
Credit extended to Buyers
Credit enjoyed from Suppliers
Delayed Wage Payment

Question 7

Effect of Production Cycle on Working Capital

Answer 7

Long Production Cycle → Longer operating cycle, more working capital needed
Short Production Cycle → Shorter operating cycle, less working capital needed

Question 8

Sources of Funds for Working Capital

Answer 8

Borrowings from banks/financial institutions
Short-term finance from suppliers (credit period)
Unsecured non-bank short-term sources
Pledging
Factoring

Question 9

Factoring

Answer 9

Factoring is the process of selling commercial accounts receivables (invoices) to a third party (Factor) at a discount for instant cash.

Question 10

Inter-Company Deposits

Answer 10

Short-term deposits made by one company in another, typically for up to 6 months.