Question

Explain the following as factor affecting the requirements of working capital:

Operating efficiency

Answer 1

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