Question

Arun is a successful businessman in the paper industry. During his recent visit to his friend’s place in Mysore, he was fascinated by the exclusive variety of incense sticks available there. His friend tells him that Mysore region is known as a pioneer in the activity of Agarbatti manufacturing because it has a natural reserve of forest products especially Sandalwood to provide for the base material used in production. Moreover, the suppliers of other types of raw material needed for production follow a liberal credit policy and the time required to manufacture incense sticks is relatively less. Considering the various factors, Arun decides to venture into this line of business by setting up a manufacturing unit in Mysore.

In context of the above case:

1. Identify of the above case:

2. Identify the three factors mentioned in the paragraph which are likely to affect the working capital requirements of his business.

Answer 1

1. Investment decision has been taken by Arun. Investment decision seeks to determine as to how the firm’s funds are invested in different assets. It helps to evaluate new investment proposals and select the best option on the basis of associated risk and return. Investment decision can be long term or short-term. A long-term investment decision is also called a Capital Budgeting decision

2. The three factors mentioned in the paragraph which are likely to reduce the working capital requirements of his business are as follows:

a) Available of raw material  b) Production cycle  c) Credit availed

a) Availability of raw material: If raw materials like Sandalwood and other forest products are readily available in Mysore, it reduces the need for extensive inventory holdings. Arun can procure raw materials as needed, minimizing the amount of working capital tied up in inventory.

b) Production cycle: A shorter production cycle means that the time it takes to convert raw materials into finished products is reduced. This leads to faster turnover of inventory and decreases the amount of working capital required to fund the production process.

c) Credit availed: If suppliers offer a liberal credit policy, Arun can purchase raw materials on credit, delaying the outflow of cash. This reduces the immediate need for working capital to finance raw material purchases, allowing Arun to allocate his capital to other areas of the business or to cover operating expenses.