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

Sundaram Textiles has a raw material holding period of 30 days, a WIP period of 10 days, a finished goods holding period of 20 days, a receivables period of 40 days and receives 30 days of credit from suppliers. Annual cost of sales is Rs 3,60,000 (use 360 days). Ignoring cash and any other items, the working capital requirement on a cost basis is approximately:

The net operating cycle is 100 days less 30 days of supplier credit, giving 70 days. With daily cost of sales of Rs 1,000, working capital required is Rs 70,000. Ignoring creditors would wrongly give Rs 1,00,000.

  1. ARs 70,000
  2. BRs 1,00,000Correct
  3. CRs 1,30,000
  4. DRs 2,00,000

Explanation

Gross operating cycle = 30+10+20+40 = 100 days; net cycle = 100-30 = 70 days. Daily cost = 3,60,000/360 = Rs 1,000. Working capital = 70 x 1,000 = Rs 70,000. The Rs 1,00,000 option ignores creditors' period, so it is wrong.

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