Core concepts
- 01WC = Current Assets − Current Liabilities; gross WC = total CA.
- 02Operating cycle = Inventory days + Debtors days − Creditors days.
- 03Approaches: Conservative (high WC, low risk), Aggressive (low WC, high risk), Matching/Hedging.
- 04Receivables management: credit policy (terms, period, standards, collection).
- 05Cash management: Baumol model (transaction motive), Miller-Orr model (random cash flow).
Flowchart summary
Operating Cycle Cash --> Raw Material --> WIP --> Finished Goods --> Debtors --> Cash ^ | Creditors (short-cut)
Exam-critical pointers
- ⭐Higher operating cycle → higher WC investment → lower ROCE.
- ⭐Factoring: with recourse vs without recourse — risk of bad debt.
- ⭐Tandon Committee norms (3 lending methods) — historical but conceptually tested.
- ⭐Cash credit limit largely based on max permissible bank finance (MPBF).
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