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working capital

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › working capital

  • This topic has 4 replies, 2 voices, and was last updated 3 years ago by John Moffat.
Viewing 5 posts - 1 through 5 (of 5 total)
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  • April 21, 2022 at 10:21 am #654180
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    Hello sir John hope you are doing alright? why the faster the working capital cycle turn why do we need less working capital funding?

    April 21, 2022 at 10:47 am #654183
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    let me rephrase the question sir, why the Quicker the operating cycle less amount of investment in working capital is needed and why it improves the profitability. ?

    April 21, 2022 at 4:37 pm #654220
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    One way of reducing the operating cycle is to collect receivables faster. If that happens then the level of receivables will be lower. The same happens with inventory. If receivables and inventories are lower then the working capital overall will be lower and therefore less investment is needed.

    If less investment is needed in working capital then there is less interest cost involved and therefore profits will be higher. (In addition, collecting receivables faster means less chance of irrecoverable debts, and lower inventories means less chance of inventory becoming obsolete – both of these means less expense and therefore more profits.)

    April 22, 2022 at 7:47 am #654252
    dennissherpa101
    Member
    • Topics: 58
    • Replies: 60
    • ☆☆

    Sir if we were to collect the receivables faster wouldn’t this improve our liquidity so lower the working cycle days higher the liquidity? but if there is lower working capital cycle then lower investment in working capital so lower liquidity doesnot this contradict each other?

    April 22, 2022 at 3:27 pm #654296
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    Liquidity is a measure of how easily the company is able to pay it’s bills. The current ratio and the acid test ratio are to measures of this. However they are ratios – it is not the overall level of working capital that matters.

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