Question:
Explain the following factors affecting the working capital requirements of a company:
(a) Operating Efficiency
(b) Availability of Raw Material
Explain the following factors affecting the working capital requirements of a company:
(a) Operating Efficiency
(b) Availability of Raw Material
(a) Operating Efficiency
(b) Availability of Raw Material
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Working capital factors questions often test the trade-off between operational efficiency (reducing WC) and risk management (increasing WC).
Updated On: Jun 23, 2025
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Solution and Explanation
(a) Operating Efficiency:
\item Inventory Turnover Ratio:
- High turnover reduces inventory holding period → Lower working capital needs
- Example: Dell's just-in-time system reduced inventory from 20 days to 5 days
\item Cash Conversion Cycle:
- Efficient firms have shorter cycles:
Raw material to finished goods (production efficiency)
Sales to cash collection (credit policy effectiveness) - Case: Toyota's 30-day cycle vs industry average of 45 days \item Process Optimization: - Lean manufacturing reduces WIP (Work-in-Progress) - Six Sigma cuts defect-related working capital lockups (b) Availability of Raw Material: \item Seasonal Availability: - Agri-businesses require higher working capital for off-season stocking - Example: Sugar mills stock cane for 6-8 months operation \item Supplier Reliability: - Unreliable suppliers necessitate safety stock → Higher working capital - Case: Apple's 900M dollars prepayment to secure flash memory during shortages \item Geopolitical Factors: - Import-dependent industries need buffer stock - Example: Indian pharmaceutical companies maintaining 3-6 months API inventory \item Price Volatility: - Commodity price fluctuations may necessitate forward buying - Steel manufacturers often hedge through inventory accumulation
Raw material to finished goods (production efficiency)
Sales to cash collection (credit policy effectiveness) - Case: Toyota's 30-day cycle vs industry average of 45 days \item Process Optimization: - Lean manufacturing reduces WIP (Work-in-Progress) - Six Sigma cuts defect-related working capital lockups (b) Availability of Raw Material: \item Seasonal Availability: - Agri-businesses require higher working capital for off-season stocking - Example: Sugar mills stock cane for 6-8 months operation \item Supplier Reliability: - Unreliable suppliers necessitate safety stock → Higher working capital - Case: Apple's 900M dollars prepayment to secure flash memory during shortages \item Geopolitical Factors: - Import-dependent industries need buffer stock - Example: Indian pharmaceutical companies maintaining 3-6 months API inventory \item Price Volatility: - Commodity price fluctuations may necessitate forward buying - Steel manufacturers often hedge through inventory accumulation
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