Working Capital Management Very Short Answer Type Questions

Question 1.
What is Working Capital?
Answer:
Working capital is that part of the firms total capital which is required for financing short term assets or current assets.such as cash, debtors, inventories, marketable securities. It is also known as circulating capital.

Question 2.
Explain the concept of working capital.
Answer:
Working capital is the amount of funds necessary to cover the cost of Operating the enterprise. There are two concepts of working capital: (i) Gross working capital (ii) Net working capital Gross working capital is the capital invested in total current assets of the enterprise. Net working capital is the excess of current assets over current liabilities.

Question 3.
Mention the different types of working capital.
Answer:
The different types of working capital are:

  • Permanent working capital
  • Temporary working capital
  • Gross working capital
  • Net working capital

Question 4.
What do you mean by working capital management?
Answer:
Working capital management refers to the administration of all aspects of current assets namely cash, debtors, inventories and marketable securities and current liabilities. This basically determines the levels and compositions of current assets to ensure that right sources are tapped to finance current assets and current liabilities are paid in time.

Question 5.
Differentiate between Gross and Net Working Capital.
Answer:
Gross working capital is a broader concept which includes all the current assets of the company whereas net working capital is the difference between current assets and current liabilities.

Question 6.
What is conservative approach to working capital financing?
Answer:
Conservative approach to working capital financing depends on long-term funds for financing needs. The firm finances the permanent current assets and a part of the temporary current assets with long-term funds. If the temporary assets are not needed then the long-term funds are invested in the marketable securities. A firm following this approach will face less risk but along with Sow returns.

Question 7.
State any two determinants of working capital.
Answer:
The two determinants of working capital are:

  • Opersational efficiency
  • Growth and Expansion

Question 8.
What is operating cycle?
Answer:
The term operating cycle or cash cycle refers to the time duration required to convert the cash to raw materials, raw materials to work-in-progress, work in progress to finished goods, finished goods to debtors and debtors back to cash.

Question 9.
What is cash management?
Answer:
Cash management refers to the process of managing cash i.e. its inflow and outflow in an organisation for cash demanding activities and minimising funds committed to cash balances.

Question 10.
What is cash cycle?
Answer:
It is the net time interval between cash collections from sale of the product and cash payment for resources acquired by the firm. It also represents the time interval over which additional funds called working capital, should be obtained in order to carry out the firm’s operations.

Question 11.
Name the various floats which necessitates management of cash.
Answer:
Float refers to the amount of money tied up between the time a payment is initiated and cleared funds become available in the company’s bank account. The different types of float are:

Question 12.
Mention various Cash Management Techniques.
Answer:
The various cash management techniques include the following:

  • Budgeting
  • Investing
  • Credit
  • Generating income

Question 13.
Give the meaning of receivables.
Answer:
Receivables are also known as accounts receivables or Book debts. Receivables are the claims against its customers for the goods sold to the customers in the ordinary course of business on credit basis. The purpose of lending goods on credit basis is to attract more customers, meet competition and to increase sales and profits.

Question 14.
What is receivable management?
Answer:
Receivables management is a decision making process which takes into account the creation of debtors turnover and minimising the cost of borrowing of working capital due to lacking of funds in receivables.

Question 15.
What is Ageing Schedule?
Answer:
Ageing schedule is a table that classifies accounts receivable and payables according, to their dates. It helps in managing cash and analyzing payments.

Question 16.
What do you mean by Debtors Turnover Ratio?
Answer:
A concern may sell goods on cash as well as on credit. Credit is one of the important elements of sales promotion. The volume of sales can be increased by following a liberal credit policy.
Debtors/Receivables Turnover = \(\frac{\text { Net Credit Annual Sales }}{\text { Average Trade Debtors }}\)
= No. of times
Trade Debtors = Sundry debtors + Bills Receivables
Debtors should always be taken to gross value. No provision for bad and doubtful debts be deducted from them. Generally, the higher the value of debtors turnover the more efficient is the management of debtors/sales or more liquid are the debtors.

Question 17.
What is Inventory Management?
Answer:
Inventory Management refers to the purchase of raw materials from the right source at the right time and at the -right price and supplying the materials to the production department as and when required. The main objective of inventory management is to reduce the order placing, receiving and inventory carrying cost

Question 18.
State the objectives of inventory management.
Answer:
The basic objectives of inventory management are:

  • Availability of materials
  • Best services to consumers
  • Wastage minimisation
  • Optimum Investment

Question 19.
Give the meaning of EOQ.
Answer:
Economic Order Quantity is a point at which the carrying cost and the ordering cost are equal. Economic order Quantity is that size of the lot to be purchased which is economically viable. This is the quantity of material which can be purchased at minimum costs.

Question 20.
Mention two benefits of holding inventories.
Answer:
Various benefits of holding inventories are:

  • Avoiding Lost Sales
  • Gaining Quantity Discounts
  • Reducing Order Cost

Question 21.
Mention the techniques of inventory management.
Answer:
The techniques of inventory management are:

  • Fixation of levels
  • ABC Analysis
  • VED analysis
  • FSN analysis
  • Economic order quantity
  • Perpetual inventory system.

Question 22.
What is ABC analysis OR Pareto analysis?
Answer:
ABC analysis is a method of material control wherein the materials are divided into a number of categories. Materials are controlled giving importance to its value. Materials are graded as A, B & C where in materials with ‘A’ grade are costly in value but less in number where as materials with ‘C” grade are cheap in value and more in number. Grade ‘B’ materials are moderate in value and moderate number of such items are maintained.

Question 23.
What is Just-In-Time Management?
Answer:
Just-In-Time (JIT) is a broad philosophy of seeking excellence and eliminating waste in the manufacturing process. A major objective of JIT is to have items only at the right place at the right time i.e. to purchase and produce items only before they are needed so that work-in-process inventory is keet low. As a concept, JIT means that virtually no inventories are held at any stage of production and that exact number of units is brought to each successive stages of production at the right time.

Question 24.
What do you mean by safety stock?
Answer:
The receipt of inventory from the suppliers may be delayed beyond the expected lead time. The delay may be because of strikes, floods, transportation and communication barriers, and also because of seasonal nature of the raw materials. This inturn would disrupt the production schedule. To prevent this situation the firm maintains additional inventory which is known as “safety stock”.