Class 12 Business Studies - Chapter Financial Management NCERT Solutions | What is working capital? Discuss five im
What is working capital? Discuss five important determinants of working capital requirement?
The capital invested in current or working assets such as stock of materials and finished goods, accounts receivable, bills receivable, short-term securities and cash or bank balance for meeting day-to-day expenses is known as working capital or current capital.
Five important determinant of working capital requirement are:
-
Nature of Business: The basic nature of a business influences the amount of working capital. A trading organisation and a service industry firm usually needs a smaller amount of working capital as compared to a manufacturing organisation.
-
Scale of Operations: Organisations which operates on a large scale, their quantum of inventory and debtors required is generally high. Such organizations, therefore, require large amount of working capital as compared to the organisations which operates on a lower scale.
-
Business cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be larger and, therefore, larger amount of working capital is required. As against this, the requirement for working capital will be lowers during the period of depression, since the sales as well as production will be less.
-
Seasonal Factors: Some of the businesses have seasonal operations. During peak season, larger amount of working capital is required because of higher level of activity.
As against this, the level of activity as well as the requirement for working capital will be lower during the lean season. -
Production cycle/operating cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Some businesses have a longer production cycle while some have a shorter one. Duration and the length of production cycle affect the amount of funds required for raw materials and expenses.
More Questions From Class 12 Business Studies - Chapter Financial Management
- Q:-
Sunrises Ltd. dealing in readymade garments, is planning to expand its business operations in order to cater to international market. For this purpose the company needs additional ₹ 80,00,000 for replacing machines with modern machinery of higher production capacity. The company wishes to raise the required funds by issuing debentures. The debt can be issued at an estimated cost of 10%. The EBIT for the previous year of the company was ₹ 8,00,000 and total capital investment was ₹ 1,00,00,000. Suggest whether issue of debenture would be considered a rational decision by the company. Give reason to justify your answer. (Ans. No, Cost of Debt (10%) is more than ROI which is 8%).
- Q:-
Aval Ltd. is engaged in the business of export of canvas goods and bags. In the past, the performance of the company had been upto the expectations. In line with the latest demand in the market, the company decided to venture into leather goods for which it required specialised machinery. For this, the Finance Manager Prabhu prepared a financial blueprint of the organisation’s future operations to estimate the amount of funds required and the timings with the objective to ensure that enough funds are available at right time. He also collected the relevant data about the profit estimates in the coming years. By doing this, he wanted to be sure about the availability of funds from the internal sources of the business. For the remaining funds, he is trying to find out alternative sources from outside.
a. Identify the financial concept discussed in the above paragraph. Also, state the objectives to be achieved by the use of financial concept so identified. ( Financial Planning).
b. ‘There is no restriction on payment of dividend by a company’. Comment. ( Legal & Contractual Constraints)
- Q:-
Ramnath is into the business of assembling and selling of televisions. Recently he has adopted a new policy of purchasing the components on three months credit and selling the complete product in cash. Will it affect the requirement of working capital? Give reason in support of your answer.
- Q:-
Amrit is running a ‘transport service’ and earning good returns by providing this service to industries. Giving reason, state whether the working capital requirement of the firm will be ‘less’ or ‘more’.
- Q:-
‘S’ Limited is manufacturing steel at its plant in India. It is enjoying a buoyant demand for its products as economic growth is about 7–8 per cent and the demand for steel is growing. It is planning to set up a new steel plant to cash on the increased demand. It is estimated that it will require about `5000 crores to set up and about `500 crores of working capital to start the new plant.
a. Describe the role and objectives of financial management for this company.
b. Explain the importance of having a financial plan for this company. Give an imaginary plan to support your answer.
c. What are the factors which will affect the capital structure of this company?
d. Keeping in mind that it is a highly capital-intensive sector, what factors will affect the fixed and working capital. Give reasons in support of your answer. - Q:-
Explain the factors affecting dividend decision?
- Q:-
What are the main objectives of financial management? Briefly explain.
- Q:-
What is financial risk? Why does it arise?
- Q:-
“A capital budgeting decision is capable of changing the financial fortunes of a business.” Do you agree? Give reasons for your answer?
- Q:-
Name the concept of financial management which increases the return to equity shareholders due to the presence of fixed financial charges.
Popular Questions of Class 12 Business Studies
- Q:-
How does planning provide direction?
- Q:-
What is meant by staffing?
- Q:-
Identify the network of social relationships which arises spontaneously due to interaction at work.
- Q:-
What is informal communication?
- Q:-
State the meaning of controlling.
- Q:-
What is meant by management?
- Q:-
What is a Treasury Bill?
- Q:-
State any two advantages of branding to marketers of goods and services?
- Q:-
What makes principles of management flexible?
- Q:-
Under which consumer right does a business firm set up consumer grievance cell?
Recently Viewed Questions of Class 12 Business Studies
- Q:-
How does leadership style affect employee performance?
- Q:-
Discuss the elements of delegation.
- Q:-
An auto company C Ltd. is facing a problem of declining market share due to increased competition from other new and existing players in the market. Its competitors are introducing lower priced models for mass consumers who are price sensitive. C Ltd. realized that it needs to take steps immediately to improve its market standing in the future. For quality conscious consumers, C Limited plans to introduce new models with added features and new technological advancements. The company has formed a team with representatives from all the levels of management. This team will brainstorm and will determine the steps that will be adopted by the organisation for implementing the above strategy. Explain the features of Planning highlighted in the situation given below. (Hint: Planning is pervasive, Planning is futuristic and Planning is a mental exercise).
- Q:-
What is the marketing concept?
- Q:-
Explain the role of human resource management (HRM) in the staffing function.
- Q:-
Discuss the various ways through which the government protects consumers.
- Q:-
India’s largest domestic investor Life Insurance Corporation of India has once again come to government’s rescue by subscribing 70% of Hindustan Aeronautics’ ₹4,200-crore initial public offering.
a. Which market is being reflected in the above case?
b. State which method of floatation in the above identified market is being highlighted in the case? (Primary Market)
c. Explain any two other methods of floatation. (Private Placement, Offer through prospectus, offer for sale). - Q:-
A company manufacturing sewing machines set up in 1945 by the British promoters follows formal organisation culture in totality. It is facing lot of problems in delays in decision making. As the result it is not able to adapt to changing business environment. The work force is also not motivated since they cannot vent their grievances except through formal channels, which involve red tape. Employee turnover is high. Its market share is also declining due to changed circumstances and business environment. You are to advise the company with regard to change it should bring about in its organisation structure to overcome the problems faced by it. Give reasons in terms of benefits it will derive from the changes suggested by you.
- Q:-
Discuss the significance of leadership in directing, with examples of different leadership styles.
- Q:-
How does branding help in creating product differentiation? Does it help in marketing of goods and services? Explain.
- All Chapters Of Class 12 Business Studies
- All Subjects Of Class 12