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Working Capital Management Interview Questions & Answers - Learning Mode

Working Capital Management Interview Questions & Answers - Learning Mode

Working capital is the difference between the inflow and outflow of funds. In other words, it is the net cash inflow. It is defined as the excess of current assets over current liabilities and provisions. In other words it is "net current assets or net working capital".The primary purpose of working capital management is to make sure the company always maintains sufficient cash flow to meet its short-term operating costs and short-term debt obligations.

Try Working Capital Management Interview Questions & Answers - Exam Mode

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Working Capital Management Interview Questions & Answers - Learning Mode
Try Working Capital Management Interview Questions & Answers - Exam Mode
Question: Name the types of working capital.

Answer: a) Networking Capital
b) Gross Working Capital
c) Permanent Working Capital
d) Variable Working Capital
e) Balance Sheet Working Capital
f) Cash Working Capital
g) Negative Working Capital Source:
Question: What is net working capital?

Answer: The net working capital is the difference between current assets and current liabilities. The concept of net working capital enables a firm to determine how much amount is left for operational requirements. Source:
Question: What are the characteristics of permanent working capital?

Answer: a) It is classified on the basis of time factor.
b) It constantly changes from one asset to another and continues to remain in the business process.
c) Its size increases with the growth of business operations. Source:
Question: What are the objectives of inventory management?

Answer: The main objective of inventory management is to reduce the order placing, receiving and inventory carrying cost. This not only ensures continuous flow of raw materials but also reduces the cost of production. The other main objectives of inventory management are as follows:-
a) To provide continuous flow of raw materials to carry out uninterrupted production.
b) To reduce the wastages and to avoid loss of pilferage, breakage and deterioration.
c) To exploit the opportunities available Source:
Question: What is permanent working capital?

Answer: Permanent working capital is the minimum amount of current assets which is needed to conduct a business even during the dullest season of the year. It is the amount of fund required to produce the goods and services which is necessary to satisfy demand at a particular point. It represents the current assets which are necessary to satisfy demand at a particular point. Source:
Question: Explain the methods of estimating working capital.

Answer: There are two methods which are usually followed in determining working capital requirements:
a) Conventional Method: According to the conventional method, cash inflows and outflows are matched with each other. Greater emphasis is laid on li1quidity and greater importance is attached to current ratio, liquidity ratio etc which pertain to the liquidity of a business.
b) Operational Cycle Method: The length of the operating cycle is a function of the nature of a business. This method is more Source:
Question: What is long- term cash forecasting? Also state its uses.

Answer: Long- term cash forecasts are prepared to give an idea of the company's financial requirements. Once a company has developed a long- term cash forecast, it can be used to evaluate the impact of new product development or plant acquisition on the firm's financial position; three, five or more years in future. The major uses of the long- term cash forecasts are:
1. It indicates a company's future financial needs, especially for its working capital requirements.
2. It helps in eva Source:
Question: What is full service factoring?

Answer: This method is one of the popular factoring service practised in India. Under this system, factor, provides finance, maintains sales ledger, undertakes credit collection, offers protection against bad debts and offer consultancy services. Source:
Question: What is undisclosed factoring?

Answer: Under this method, instead of making a direct sale to the customer, on arrival of the time for delivery goods are sold to a factor for cash who then appoints the business as its agent to collect the debt outstanding. A cheque is received on delivery of the goods and the customers collect the debt on behalf of the factor, but the factor has no recourse to the business in the event of a bad debt arising. Source:
Question: State the characteristics that a working capital term loan should possess.

Answer: A working capital term loan should possess specific characteristics as laid down below:
a) WCTL is a shortage "long- term surplus" or net working capital (NWC) in a unit that a bank chooses to fund.
b) It is a long- term need of the unit that is met by the bank through its short- term portfolios.
c) It must be repaid in a prescribed maximum number of instalments.
d) It is a sort of "once- in- a life- time" loan. Source:
Question: State the motives for holding cash.

Answer: 1. Transaction Motive
2. Precautionary Motive
3. Speculative Motive
4. Compensatory Motive
Question: What are the factors affecting Fixed Capital requirement?

Answer: 1.Nature of business
2.Types of Products
3.Size of the firms
4.Diversity of production lines
5.Method of handling production
6.Method of acquiring the fixed assets Source:
Question: State the principles of working capital management.

Answer: a) Principle of Risk Variation
b) Principle of Cost of Capital
c) Principle of Equity Position
d) Principle of Maturity of Payment Source:
Question: State the cash management models.

Answer: Certain models have been developed to manage the cash. These models assist in determining the optimum cash to be held by the enterprise. The models are:
a) Baumol Model
b) Miller- orr Model
c) Orgler's Model Source:
Question: What is temporary or variable working capital? What are its characteristics?

Answer: It represents the additional assets which are required at different times during the operating year- additional inventory, extra cash etc. It is temporarily invested in current assets and possesses the following characteristics:-
a) It is not always gainfully employed, though it may change from one asset to another.
b) It is particularly suited to business of a seasonal or cyclical nature. Source:
Question: What is cash planning?

Answer: Cash planning is a technique to plan for and control the use of cash. It protects the financial condition of the firm by developing a projected cash statement from a forecast of expected cash inflows and outflows for a given period. Cash plans are very crucial in developing the overall operating plans of the firm. Cash planning may be done on daily, weekly or monthly basis. Source:
Question: What is gross working capital? What are its advantages?

Answer: Gross working capital is the amount of funds invested in the various components of current assets. This concept has the following advantages:
a) Gross working capital provides the correct amount of working capital at the right time.
b) It enables a firm to realize the greatest return on its investment.
c) It helps in the fixation of various areas of financial responsibility.
d) It enables a firm to plan and control funds and to maximise the returns on investment. Source:
Question: Explain the tests of working capital policy.

Answer: There are four tests of working capital policy:-
a) Level of Working Capital: This should be maintained by a careful study of the movements of working capital in successive periods. If a management can develop a pattern in these movements, this pattern would serve as a guide to its changing requirements in relation to certain decisions which are made from time- to- time.
b) Structural Health: The relative health of the various components of the working capital should be considered from the Source:
Question: Explain the five C's of credit rating.

Answer: 1. Character:- Character refers to the temperament of the customer. It is to be judged whether the customer is honest and is prompt in paying the dues that he had undertaken to pay.
2. Capacity:- Capacity refers to the ability of the customer to pay back the purchase price. This can be measured by conducting a detailed investigation of his dealings, his past actions, his possessions, his business methods etc.
3. Capital:- Capital refers to the financial soundness of the customers. This can Source:
Question: What is the sound management policy for accounts receivable?

Answer: 1. Credit Rating
2. Credit Period
3. Collection Policy
4. Discounts Source:

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