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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.

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Working Capital Management Interview Questions & Answers - Learning Mode
Try Working Capital Management Interview Questions & Answers - Exam Mode
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: 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 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: 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: 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 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: 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: 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: 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 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: State the tools of inventory management.

Answer: i) Fixation of levels.
ii) ABC analysis
iii) EOQ
iv) Perpetual inventory system
v) VED analysis
vi) FSN analysis
vii) Periodical inventory evaluation
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 the difference between Fixed and Working Capital?

Answer: Fixed capital investments represent the acquisition and maintenance of long-term assets. A fixed capital investment can be tangible asset,such as a building, or an intangible asset, such as an intellectual property. Working capital refers to the deployment of financial resources in the day-to-day business operations. Source:
Question: State the motives for holding cash.

Answer: 1. Transaction Motive
2. Precautionary Motive
3. Speculative Motive
4. Compensatory Motive
Question: What is agency factoring?

Answer: This is a unique type of factoring arrangement in which the risks and responsibility of clients and factors are clearly defined. Client takes the responsibility of maintaining the sales ledger administration and collection of debts from the customers. Factor assumes the responsibility of down payment/ pre- payment facility to the client and protect the client against bad debts. 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: 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 are the factors affecting Working Capital requirements?

Answer: 1. Size Of Business
2. Nature Of Business
3. Storage Time Or Processing Period
4. Credit Period
5. Seasonal Requirement
6. Potential Growth Or Expansion Of Business
7. Changes In Price Level 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:

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