- 20 Marks
Question
a. Working capital is generally understood to mean the difference between current assets and current liabilities. Explain the term working capital cycle. (2 Marks)
b. List FIVE factors that determine the working capital requirements of a firm. (5 Marks)
c. GLORY Limited has provided you with the following data regarding next year’s budget that has just been presented to the board by the financial controller of the company:
| Budgeted Average Amount Outstanding | N |
|---|---|
| Inventory: Raw materials | 480,000 |
| Work-in-Progress | 360,000 |
| Finished goods | 244,800 |
| Receivables | 600,600 |
| Payables | (422,400) |
| Budgeted Average Working Capital | 1,263,000 |
The following are available daily averages:
| Daily Averages | N |
|---|---|
| Revenue | 9,240 |
| Cost of Sales | 7,200 |
| Purchases of raw materials | 3,840 |
You are required to compute the working capital cycle based on the above figures. (13 Marks)
Answer
a. The working capital cycle is the total length of time between investing cash in paying for raw materials at the start of the production process and its recovery at the end with the collection of cash from receivables. It is a cycle that tracks how long it takes for a business to convert its net working capital into cash.
b. Factors determining working capital requirements:
i. Production cycle
ii. Nature of business
iii. Technology and Manufacturing Policy
iv. Credit Policy
v. Size of the firm
vi. Credit granted by suppliers
vii. Business fluctuations
viii. Sales and demand conditions
ix. Operating efficiency
x. Price level changes
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