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1. Why does the working capital increases as the sales increases
2. why should an increase in the cash operating cycle decrease profitability.1. If you sell more then you are going to have more receivables. You are always going to need to buy more and therefore you are going to need more inventory and you are going to have more payables.
2. The more money you have tied up in working capital, the more interest you will be paying (if it is financed by an overdraft) or the more interest you would be losing (because you have less cash that could have been earning interest).
Have you watched my free lectures on working capital – this is all discussed in the lecture.
(The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.)
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