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Importance of Working Capital, Accountancy and Financial management Video Lecture | Accountancy and Financial Management - B Com

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FAQs on Importance of Working Capital, Accountancy and Financial management Video Lecture - Accountancy and Financial Management - B Com

1. What is working capital and why is it important in accountancy and financial management?
Ans. Working capital refers to the funds available to a company for its day-to-day operations. It is calculated by subtracting current liabilities from current assets. Working capital is crucial in accountancy and financial management as it indicates a company's liquidity, operational efficiency, and financial health. It helps in determining if a company has enough resources to meet its short-term obligations and cover its operating expenses.
2. How does working capital affect a company's financial performance?
Ans. Working capital directly impacts a company's financial performance. Insufficient working capital can lead to cash flow problems, inability to pay suppliers and employees on time, missed business opportunities, and even bankruptcy. On the other hand, excess working capital may indicate inefficient use of resources and missed investment opportunities. Maintaining an optimal level of working capital is essential for a company to ensure smooth operations and sustainable growth.
3. What are the different sources of working capital?
Ans. There are various sources of working capital, including: - Short-term loans: Companies can borrow funds from financial institutions or banks to meet their working capital requirements. These loans are usually repaid within a year. - Trade credit: Suppliers may offer extended payment terms to their customers, allowing them to delay payments for goods or services received. This acts as a source of short-term working capital. - Equity financing: Companies can raise working capital by issuing shares or equity to investors. This can provide a long-term source of funds. - Internal accruals: Companies can generate working capital through internally generated profits, retained earnings, or by reducing non-operational expenses.
4. How can efficient working capital management improve a company's profitability?
Ans. Efficient working capital management can positively impact a company's profitability in several ways: - Improved cash flow: Effective management of receivables, payables, and inventory helps in maintaining a steady cash flow, reducing the risk of liquidity crunches. - Reduced financing costs: By optimizing working capital, a company can minimize the need for external financing, resulting in lower interest expenses and reduced reliance on costly sources of capital. - Increased operational efficiency: Proper management of working capital ensures that a company has the necessary resources to meet its operational needs, leading to smoother operations and improved productivity. - Enhanced profitability ratios: Efficient working capital management improves key financial ratios such as return on investment (ROI) and return on equity (ROE), which are important indicators of profitability.
5. How can a company determine its optimal level of working capital?
Ans. Determining the optimal level of working capital requires a careful analysis of a company's industry, business model, and specific requirements. Factors to consider include: - Industry norms: Understanding the average working capital levels in the industry can provide a benchmark for comparison and help determine if a company's working capital is too high or too low. - Cash conversion cycle: Analyzing the time it takes for a company to convert inventory into sales and collect cash can help identify areas for improvement and optimize working capital. - Seasonality and business cycles: Companies experiencing seasonal demand fluctuations or cyclical business patterns may need to adjust their working capital requirements accordingly. - Risk tolerance: Companies with a higher risk tolerance may choose to maintain a higher level of working capital to mitigate potential financial risks. - Growth plans: Companies planning for expansion or acquisitions may require additional working capital to support their growth objectives. By considering these factors, a company can strike a balance between ensuring sufficient working capital for smooth operations and minimizing the costs associated with excess working capital.
44 videos|75 docs|18 tests
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