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Question
Explain the following as factor affecting the requirements of working capital:
Operating efficiency
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Solution
Operating efficiency: A highly efficient organisation uses its raw material and other inputs appropriately with minimum wastage, as they can handle its operations even with a low inventory. This indicates that an organisation is with a higher inventory turnover ratio and a higher debtor’s turnover ratio which requires lower working capital.
Low operating efficiency ⇒ High working capital
High operating efficiency ⇒ Low working capital
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