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CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Working Capital Management

A data analyst at an Indian retailer plots monthly working capital requirement over three years and sees a regular peak every October-November (festival season) and trough in February. Which factor affecting working capital does this pattern most directly show?

The recurring festival-season peak shows seasonal variation, which creates variable or temporary working capital above the permanent base. Permanent working capital is the minimum level needed all year and would not produce this repeating rise and fall in the plotted series.

  1. AVariable (temporary) working capital arising from seasonal operationsCorrect
  2. BPermanent working capital arising from the minimum stock level
  3. CFixed capital needs for plant expansion
  4. DDividend policy of the firm

Explanation

A recurring seasonal swing above a base level is the fluctuating or temporary component of working capital. The base level that persists throughout the year is permanent working capital, which does not show the peaks.

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