Business Studies

Financial Management

Question:

What is meant by working capital? How is it calculated?
Discuss five important determinants of working capital requirements.

Answer:

Working capital is that part of total capital which is required to H meet day-to-day expenses, to buy raw materials, to pay wages and other
expenses of routine nature in the production process or we can say it refers 2 to excess of current assets over current liabilities.
Working Capital = Current Assets – Current Liabilities
Factors affecting working capital requirement are
2 (i) Nature of Business The basic nature of a business influences the
amount of working capital required. A trading organisation usually needs a lower amount of working capital compared to a manufacturing organisation. This is because in trading, there is no processing required. In a manufacturing business, however, raw materials need to be converted into finished goods, which increases the expenditure on raw material, labour and other expenses,
(ii) Scale of Operation The firms which are operating on a higher scale of operations, the quantum of inventory, debtors required is generally high, Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.
(iii) Production Cycle Production cycle is the time span between the receipts of raw materials and their conversion into finished goods.
Some businesses have a longer production cycle while some have a shorter one. Working capital requirement is higher in terms with longer processing cycle and lower in firms with shorter processing cycle.
(iv) Credit Allowed Different firms allow different credit terms to their customers. A liberal credit policy results in higher amount of debtors, increasing the requirements of working capital.
(v) Credit Availed Just as a firm allows credit to its customers it also may get credit from its suppliers. The more credit a firm avails on its purchases, the working capital requirement is reduced.

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Financial Management

Q 1.

Explain factors affecting the dividend decision.

Q 2.

Discuss the two objectives of Financial Planning.

Q 3.

What are the factors which will affect the capital structure of this company?

Q 4.

Explain the importance of having a financial plan for this company. Give an imaginary plan to support your answer.

Q 5.

Discuss about working capital affecting both the liquidity as well as profitability of a business.

Q 6.

‘S’ Limited is manqufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as economic growth is about 7%-8% and the demand for steel is growing. It is planning to set up a new steel plant to cash on the increased demand it is facing. It is estimated that it will require about ? 5,000 crores to set up and about t 500 crores of working capital to start the new plant.

 What is the role and objectives of financial management for this company?

Q 7.

What is the main objective of financial management? Explain briefly.

Q 8.

What is meant by capital structure?

Q 9.

Define a ‘current assets’ and give four examples.

Q 10.

Capital structure decision is essentially optimisation of risk-return relationship. Comment.

Q 11.

Financial management is based on three broad financial decisions. What are these?

Q 12.

Keeping in mind that it is a highly capital intensive sector what factors will affect the fixed and working capital. Give reasons with regard to both in support of your answer.

Q 13.

What is ‘financial risk? Why does it arise?

Q 14.

What is meant by working capital? How is it calculated?
Discuss five important determinants of working capital requirements.

Q 15.

A capital budgeting decision is capable of changing the financial fortune of a business. Do you agree? Why or why not?

Q 16.

Explain the term ‘trading on equity’. Why, when and how it can used by a business organisation?