Working Capital Management

Question 1

Working Capital

Answer 1

CA-CL

Question 2

Current Assets

Answer 2

Those which can be converted to cash within a short duration, generally less than one year. Inventories, Debt, Cash and Bank Balances, Prepaid Expenses, Loans and Advances, Marketable Investments.

Question 3

Current Liabilities

Answer 3

fall for payment or settlement within a short duration or time period, ie less than a year like Trade Creditors, Outstanding Expenses, Tax Provision, Proposed and Unclaimed Dividend, Short Term Expenses, Bank OD, Cash Credit

Question 4

Importance of WC

Answer 4

1. It is required to use fixed assets profitably. e.g. A machine needs raw materials
2. For day-to-day operations and transactions. These are provided by cash and cash equivalents forming parts of current assets
3. It determines the short-term solvency of the firm. Inadequate Working Capital means the firm will be unable to meet its immediate payment commitments
4. Funds are obtained from a mix of short-term and long-term sources. Hence to maintain structural health of the firm they need to be invested appropriately in a mix of short and long term assets
5. Increase in sales and activity levels should be backed up by suitable investment in WC. Otherwise it will lead to under-capitalism and over-trading
6. maintaining balance between profitability and liquidity, which are inversely related

Question 5

Adequate WC when

Answer 5

CA> CL
CR= CA:CL=2:1
Quick Ratio= Quick Assets: Quick L= at least 1:1
Current Assets/ Fixed Assets is neither too low (aggressive) neither too high (conservative)

Question 6

Permanent Vs Temporary WC

Answer 6

Read from notes

Question 7

WCC

Answer 7

Working Capital Cycle or WCC is the time required for conversion of cash into cash equivalents like raw materials, WIP, FG, Debtors, and back into cash

Question 8

Segments of Operating cycle

Answer 8

1. Lead Time: Cash to RM
2. Production/ process cycle: RM to WIP to FG
3. Stockholding period: FG to Debtors through sales
4. Conversion of Receivables into cash: Average Collection period

Question 9

WCC computation

Answer 9

WCC in days= RM storage period+ WIP holding period+ FG storage period+ debtors collection period- creditors payment period

Question 10

Duration of WCC

Answer 10

Should be on par with industry standard. Long cycle indicates overstocking of inventories or delayed collection of receivables. bad
Working Capital Turnover= 365/ Operating Cycle: higher the better

Question 11

Working capital requirements can be forecasted by:

Answer 11

Total Approach
Cash Cost Approah