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  2. Can you help,please.
    Sales 200 p.y, gross pf margin 40%.inventory days max 120, min 90. Firm planes to finance perman.assets with equity,and fluctuating with owerdraft.360 days in year How much overdraft do they need? Thanks

    • If you watch all of the lectures, then you will find that I do explain this!

      Aggressive if where you keep the working capital to a minimum and therefore use more short term finance. Conservative is where you finance all the working capital from long term finance.

  4. I’m sorry if this is a stupid question but I’m a bit confused between the efficiency ratios (page 21 of the notes) and the operating cycle (page 22). I thought they both show how quickly debts are collected, payables are sold. Would you be able to clarify the difference between the two sets of ratios and when each should be used. Many thanks.

    • The operating cycle is on page 21 of our notes looks at how long cash is tied up for in working capital.

      The efficiency ratios are on page 19. and they look at each item individually.

      The operating cycle is looking at the overall affect rather than each item individually.

  6. Dear Sir,
    Thank you for the lecture. Just one moment that remained unclear to me in the example 1 – why do we take just the Purchases of raw material figure (as Credit purchases) to calculate Payables days? In my opinion we should also take indirect cost (i.e. Cost of production) for the calculation, as ,e.g. salary of workers, facilities rent charges, electricity etc. are also part of payables. Am I not right?

    Thank you in advance

  7. Sir,
    A slight confusion related to arthimatic. Can you explain if working capital=current assets less payables. But if a company decide to finance his whole working capital through current liabilities then they might cancel out each other?

    Thanks in advance Sir for making every topic crystal clear.

    • If the current assets were equal to the payables, then the working capital would be zero and would not need financing.

      However it is unlikely that this would be the case – partly because current assets will be receivables plus inventories, and partly because receivables will be at selling price whereas payables will be at cost and so you would usually expect that receivables would be higher than payables.

  8. Thank you for a great lecture Sir.

    I know you have mentioned in your lecture that we should use logic when dealing with the average amounts used to determine the effective ratios for the operating cycle,I however struggle with knowing when do I assume that the figures from the statement of position represents an average amount,as in my mind the statement of financial position figures are as at a specific point in time,and therefore do not necessarily represents the average amounts for the covered period.

  9. A great lecture sir,
    Sir i just wish to have more light on this observation from the example. We have as Receivable=73 days
    payables = 61 days
    _____
    12 DAYS . Can we say this 12 days is the daily fluctuation in working capital that need to be financed from temporary capital.

    Thanks

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