Question

Explain how the following factor affects the working capital requirement of a business: 

Operating efficiency 

Answer 1

Business operations are managed using various efficient methods. A business that effectively handles its raw resources can need less working capital. An increased inventory turnover ratio is indicative of this. In the same way, lowering the amount engaged in receivables can improve the debtor turnover ratio. Operating efficiency affects working capital in numerous ways:

1. Inventory Management: Efficient inventory management guarantees optimal amounts of inventory to fulfill consumer demand while minimizing carrying costs. An efficient organization can control inventory turnover, eliminating the need for additional working capital tied up in inventories.
2. Accounts Receivable Management: Quick collection enhances cash flow and decreases the requirement for additional working capital to fund operational expenses. Efficient companies have streamlined credit rules, efficient invoicing processes, and rigorous follow-up procedures to increase cash inflows.