Question

The Directors of Sherlock Ltd., which runs a famous fashion jewellery brand in India, have decided to expand their business activities globally especially targeting other Asian countries. Their Balance Sheet as of 31st March 2020 shows Equity Share Capital of ₹ 5 Crore, Preference Share Capital of ₹ 2 Crore and Borrowed Funds of ₹ 8 Crore. Their Balance Sheet is also reflecting Retained Earnings of ₹ 80 Lakh. The Directors are very much aware of the risks involved in International Business. Also, they are already under so much fixed obligation of payment of interest. But since they enjoy good reputation in the finance market hence various sources of finance are easily available to them. So, keeping all these factors in mind, they decided to increase their production for their international venture. For this, they need to increase the stock of raw material at an estimated cost of ₹ 1 crore.

1. Funds required to purchase the stock of raw material in order to increase the production is one of the examples of ______. (1)
2. How will the ‘method of production’ and ‘expansion plans’ of Sherlock Ltd. affect its fixed capital requirements? (2)
3. On the basis of permanency, describe the types of Working Capital. (2)
4. Discuss the significance of working capital in businesses. (3)

Answer 1

1. Funds required to purchase the stock of raw material in order to increase the production is one of the examples of working capital requirements.
2. 
   
   • Method of Production: Sherlock Ltd. uses capital-intensive techniques (automated machinery for jewellery), so it will need more fixed capital to buy machines, tools, and technology.
   • Expansion Plans: Expanding to new international markets means higher fixed capital requirements for new production units, machinery, showrooms and warehouses.
3. Types of Working Capital:
   1. Permanent/Fixed Working Capital: Minimum amount of working capital always needed for regular operations. example Stock of materials, salaries.
   2. Temporary/Variable Working Capital: Extra working capital needed for seasonal or special needs. example Bulk purchases during festivals, special orders.
4. Significance of Working Capital: 
   • Ensures smooth day-to-day operations (like paying wages, buying materials).
   • Improves creditworthiness (by paying suppliers on time).
   • Helps in taking advantage of bulk discounts and special orders.
   • Prepares the business for emergencies (like unexpected expenses or sudden demand).
   • Boosts employee morale (by ensuring timely salary payments).
   • Supports business growth by ensuring liquidity for expansion activities.