Question

Satya Prakash has been successfully running a dry fruit wholesale business in Rajasthan for the past five years. He makes sufficient investments in current assets in order to facilitate smooth day-to-day operations of the business. The company has recently sold dry fruits worth ₹ 50 lakhs to one of its corporate customers, ‘Deshmukh Pure Grains,’ on a strict credit policy. Satya Prakash then immediately placed an additional order for replenishment of stock. However, he received the dry fruits from his supplier after a large time lag.

1. State the concept of Financial Management discussed above.
2. Briefly explain the factors highlighted above that will affect the requirement of the concept identified in part a.

Answer 1

1. The concept of Financial Management discussed is Working Capital Decision.
   Working capital decisions are concerned with the decisions about the levels of cash, inventory and receivables. These decisions affect the day-to-day working of a business.
2. The factors that will affect the choice of Working capital are:
   1. Credit Allowed: Different firms allow different credit terms to their customers. These depend upon the level of competition that a firm faces as well as the credit worthiness of their clientele. A liberal credit policy results in a higher amount of debtors, increasing the requirement of working capital.
   2. Availability of Raw Material: if the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. The time lag between the placement of the order and the actual receipt of the materials (also called lead time) is also relevant. Larger the lead time, the larger the quantity of material to be stored and the larger shall be the amount of working capital required.