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The faster a firm can push items around the cycle the lower its investment in working capital will be. Why is this sir?
Because they will have lower inventory levels (due to selling items quickly) and lower receivables (due to collecting cash from customers sooner).
If inventories and receivables are both lower, then the level of working capital will be lower and therefore there is less investment needed in the working capital.
Sir since the cash is comming in faster we are able to invest lesser working capital is this also correct?
sir as you mentioned in the lectured operating cycle is how many days a business is without cash how will it survive on the days for example in the lectures paybles had to be paid 25 days but cash was not comming in till 50 days. How does it work?
Yes – if they have more cash then there is less need to raise money to finance the inventories etc..
If they have to pay the payables faster than they are receiving cash from receivables then they need to raise more finance to cover the ‘missing’ period.
So longer the missing period the larger finance they will have to raise and hence the higher working capital. Is this statement correct?
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