Q.'Isha Sweets' was set by Isha Sharma to prepare and sell organic, vegan and healthy sweets alternatives like hazelnuts date ladoos, dry fruit date burfi, stuffed mejdool date etc. For the last many years, the demand for her products was very high as people these days prefer to buy healthier alternatives for consumption as well as gifting purposes. But this year suddenly, the cost of dates, dry fruits and other ingredients used for preparing these healthy sweets had increased. With rising prices of raw materials, larger amounts of funds were required to maintain a constant volume of production and sales. As a result, the working capital requirement of 'Isha Sweets' became higher. The factor which led to an increase in the working capital requirements of 'Isha Sweets' was : (A) Availability of raw material (B) Inflation (C) Scale of business (D) Production cycle

Net Working Capital = Current Assets − Current Liabilities — this is the standard measure of a firm's short-term liquidity.

Definitions to distinguish the options

• Gross Working Capital: Simply the total investment in current assets (no deduction of liabilities).
• Net Working Capital (option C): Current Assets minus Current Liabilities — this is the amount of current assets financed by long-term funds, and is a key indicator of a firm's short-term solvency/liquidity position. …

The problem describes a situation where raw material costs have increased, leading to a higher working capital requirement for 'Isha Sweets'. This increase in costs is a direct consequence of inflation, which necessitates more funds to maintain the same level of production. The correct option is (B).

Debtors, bank overdraft and cash sales are all sources of working capital.

Working capital is the capital needed for day-to-day operations (to finance current assets). It is obtained from several short-term sources: realising money from debtors (credit customers paying up), bank overdraft / short-term bank credit, and cash sales t …

Current assets are typically financed through short-term sources because of the matching principle of finance.

The 'matching' or 'hedging' approach to financing says that the duration of financing should match the duration for which funds are needed. Current assets (inventory, debtors, cash/bank balances, prepaid expenses) are, by definition, assets expected to be converted into cash or consumed within one year, so it would be inefficient and costly to lock them into long-term finance (which generally costs more and remains tied up even when the current asset itself has already turned over). Instead, current assets are usually financed through short-term sources such as trade credit from suppliers, bank overdraft/cash credit, short-term loans, factoring, or commercial paper (for large, cr …

Current assets are best financed through a mix of both current (short-term) liabilities and long-term liabilities — a part of working capital that is permanently needed is financed long-term, while the fluctuating/seasonal part is financed through short-term sources.

Current assets consist of two components:

• Permanent/core working capital — the minimum level of current assets (cash, stock, debtors) that the business needs at all times to run operations continuously; since this need never falls to zero, it should ideally be financed through long-term sources (owner's funds, long-term loans), because relying on short-term funds for a permanent need creates renewal risk and uncertainty.
• Temporary/fluctuating working capital — the extra current assets needed to meet seasonal or peak-period requirements; since this need is temporary, it is appropriately financed through short-term/current liabilities (trade credit, bank overdraft, short-term loans), which can be repaid once the temporary need passes. …

The scenario moves from a pandemic-driven slowdown (low demand) to an economic boom (higher production and sales). These economy-wide swings are phases of the business cycle, which directly change how much working capital a firm needs. The correct option is (D).

The correct option is (a) Treasury bills.

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Bank overdraft is available on a current account.

An overdraft is a short-term borrowing facility allowing a customer to withdraw more money than is in the account, up to an agreed limit. Banks grant it on current accounts, which businesses use for regular, high-volume transactions. Savings and term-deposit accounts do not carry overdraft faciliti …

Working capital is the money needed for routine, day-to-day operations — current assets minus current liabilities.

Working capital refers to the funds a firm needs to finance its short-term, day-to-day activities such as holding stock, carrying debtors and paying routine expenses. Net working capital is calculated as current assets minus current liabilities, and it reflects the firm's short-t …

The correct option is (B) One year — the maximum tenure of a treasury bill is up to one year.

Treasury bills (T-bills) are instruments of the money market, used by the Government of India to borrow short-term funds. They are issued at a discount and redeemed at face value, in standard maturities …

Working capital = funds for day-to-day operations (current assets − current liabilities).

Working capital is the finance required for the routine, day-to-day running of a business — buying raw materials, paying wages and meeting operating expenses. In the net sense, it equals current assets (stock, debtors, cash) minus current liabilities (creditors, short-term loans). …

Higher working capital generally means a higher current ratio, lower risk, and lower profitability — the classic liquidity-profitability trade-off.

The Financial Management chapter explains the "Factors Affecting the Working Capital Requirement" through the lens of liquidity versus profitability:

• Working capital = current assets − current liabilities. Holding a larger cushion of current assets (cash, receivables, inventory) relative to current liabilities raises the current ratio, i.e. improves short-term liquidity.
• A firm with ample working capital can comfortably meet its day-to-day obligations, so the risk of running short of cash (insolvency risk) is lower.
• However, funds parked in cash/inventory/receivables generally earn little or nothing, instead of being invested in income-generating fixed assets or operations — so profitability tends to be lower as well.
• The reverse is also true: a firm that deliberately runs with lean/low working capital is taking on higher liquidity risk, but is channelling more funds into productive use, which can raise profitability. …