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CA Intermediate · Financial Management and Strategic Management · Introduction to Working Capital Management

Mehta Ltd has annual cost of sales of Rs. 36,00,000. Average raw material stock is held for 30 days, WIP conversion takes 15 days, finished goods are held 15 days, receivables are collected in 45 days (on cost basis) and creditors are paid in 30 days. Taking 360 days a year, the operating cycle in days and the working capital needed (on cost, ignoring cash) are:

The operating cycle is 30+15+15+45 minus 30 days of creditor period, which is 75 days. With daily cost of Rs. 10,000, the working capital requirement is 75 times that, Rs. 7,50,000.

  1. A75 days; Rs. 7,50,000Correct
  2. B75 days; Rs. 4,50,000
  3. C45 days; Rs. 4,50,000
  4. D105 days; Rs. 10,50,000

Explanation

Operating cycle = 30+15+15+45-30 = 75 days. Daily cost = 36,00,000/360 = Rs. 10,000. Working capital = 75 x 10,000 = Rs. 7,50,000. Rs. 4,50,000 wrongly uses 45 days.

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