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IMT-07: Working Capital Management-MT1

IMT-07: Working Capital Management-MT1




Q1. 'Uncertainty makes it difficult for a financial manager to predict company's requirements for short term funds.' Discuss. What steps can the financial manager take to minimize the resulting risks to the company?


Q2. What is conservative approach to financing firm's funds requirement? What kind of profitability-risk-tradeoff is involved?


Q3. Differentiate between:

a. Gross operating cycle and net operating cycle

b. Gross working capital and net working capital


Q4. What is credit control? What is the role of credit control department?


Q5. The Divya Paints ltd. is currently following a centralized collection system. Most of it customers are located in the cities of Northern India. The remittances mailed by customers to the central location take four days to reach. Before depositing the remittances in the bank the firm loses two days in processing them. The daily average collection of the firm is Rs. 1, 00,000.


The company is thanking of establishing a lock-box system. It is expected that such a system will reduce mailing time by one day and processing time by one day.


I. Find out the reduction in cash balances expected to result from the adoption of the lock-box system.


II. Determine the opportunity cost of the present centralized collection system if the interest rate is assumed to be 18 per cent.



III. Should the lock-box system be established if its annual cost is Rs. 24500?


Q1. 'Efficient cash management will aim at maximizing the availability of cash inflows by decentralizing collections and decelerating cash outflows by centralizing disbursements. 'Discuss


Q2. Explain the concept of ABC analysis as a technique of inventory control.

Q3. Define the following:

a. Treasury Bills

b. Commercial Papers

Q4. 'Current assets are those which are turned over and at least partially replaced within the operating cycle of the company. What are the differences you will usually find between the holding of current assets of a manufacturer who sells on credit and a retailer who sells only on cash basis?

Q5. Performa cost sheet of ABC Company provides the following data:


Costs (Per Unit)


Raw Material


Direct labour




Total cost P.U.




Selling Price




Following additional information is also available

Average raw material in stock : One month

Average material in process : Half a month

Credit allowed by suppliers : One month

Credit allowed to customers : Two months

Time lag in payments of wages : One and half week

Overheads : One month

1/4th of sales are on cash basis, cash balance is expected to be Rs. 1, 20,000/-


Prepare a statement showing the working capital needed to finance a level of activity of 70,000 units of output. Assume that production is carried on evenly throughout the year and wages and overheads accrue similarly


Q1. What is factoring? What are the types of factoring? Explain how factoring is different from bill discounting?


Q2. How bank credit and trade credit plays vital role in financing the working capital? Describe the methods suggested by Tandon Committee for financing the working capital.


Q3. Define the following:

a. Public Deposits

b. Objectives of money market

Q4. Define Working capital. What are the factors affecting the working capital management?


Q5. ABC and company buys and uses a component at Rs. 10/- per unit. The annual requirement is 2000 units. Carrying cost of inventory is 10% per annum and ordering cost is Rs. 40 per order. The purchase manager argues that as ordering cost is high, it is advantageous to place a single order for the entire annual requirement. He also says that if the order of 2000 units place at a time, there is a 3% discount from supplier. Evaluate the proposal and make your recommendation.






Better deals ltd. having an annual turnover of Rs. 80 lacs, 25% of which are cash sales. Normal credit allowed to debtors is 30 days. To increase the market share from present level, the marketing manager proposed to liberalize the credit policy which is as under:-


Credit Period

Expected credit sales

Plan - I

60 days

Rs. 70 lacs

Plan - II

90 days

Rs. 75 lacs



The product yields an average contribution of 25% on sales. The fixed cost amount to Rs. 5, 00,000 per annum. The company expects a pre-tax return of 20% on capital employed. The bad debts of the company have been from 1% to 1.5% in case of proposal I and 2% in case of Proposal II. As a finance manager, you are requested to evaluate the proposal and comment



RMT ltd are on verge of commencing commercial production for which the following projections are available for

first 12 months of operations.

I) Sales and production: 1 machine per month

II) Average selling price: Basic price Rs. 40, 00,000

Excise duty at 10%

Value Added tax (VAT) at 5%

III. Material cost 60% of basic sales price

IV. Employment cost: Category Number Monthly Cost

Manager 8 Rs. 10,000 each

Supervisor 10 Rs. 6,500 each

Worker 50 Rs. 4,000 each

V. Power and Fuel : Rs. 6, 00,000 per month

VI. Factory Overheads : Rs. 75,000 per month

VII. Selling Overheads : Rs: 1, 00,000 per month

VIII. Sales Collection 30 days

IX. Material cost payment: 70% in the same month and balance in next month.

X. Production time: 30 days

XI. Entire work force is engaged from day 1 of the commercial production and payment to employees is made in the next month. For other expenses the company has a credit of 1 month. VAT is payable in the next month of sales.

XII. The Bank has allowed the company a borrowing limit of Rs. 45,00,000 on which interest at the rate of 15% is charged every, quarter, which is calculated based on average drawing of each quarter and is payable at the beginning of the next quarter. ASE S


Q1. Prepare a cash budge for the 5 months (Jan to May) and give your comment. You may make relevant assumptions if any.



Q2. What are the motives of an organization for holding cash?

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