Q.Ramnath is into the business of assembling and selling of televisions. Recently he has adopted a new policy of purchasing the components on three months credit and selling the complete product in cash. Will it affect the requirement of working capital? Give reason in support of your answer.

Yes, this change will affect Ramnath's working capital requirement. Working capital is the funds needed for day-to-day operations, and it depends on the gap between cash inflows and cash outflows.

• Earlier, if Ramnath bought components in cash and sold on credit, he had to finance both purchases and receivables, needing more working capital.
• Now, he buys components on three months credit — so he pays for raw materials after three months.
• He sells the finished TV in cash — so he receives money immediately upon sale.
• This means his cash outflow is delayed, while cash inflow is immediate. The operating cycle shortens because there is no waiting period to collect cash from customers, and suppliers are financing his inventory for three months. …

When a business assembles and sells televisions, it needs a certain amount of working capital — the money tied up in day-to-day operations like buying raw materials, paying wages, and holding finished goods. The size of this requirement depends heavily on the operating cycle: the time gap between paying cash for inputs and receiving cash from sales. A longer operating cycle means more money is locked up for longer, so the working capital need is higher. A shorter cycle means the business gets its cash back faster, reducing the need for extra funds.

Ramnath’s earlier policy — likely buying components for cash and selling on credit — would have created a cash flow gap. He would pay out money immediately but wait to collect from customers. That gap would force him to arrange additional working capital to keep production running. Now, by shifting to purchasing components on three months credit and selling the finished televisions for cash, he has flipped the timing. He receives cash from customers right away, but he does not have to pay his suppliers for three months.

This change shortens the operating cycle dramatically. In fact, the cash inflow now occurs before the cash outflow. The money from sales can be used to pay the suppliers when the bill comes due, so Ramnath does not need to arrange separate funds for that purpose. The working capital requirement therefore falls — he can run the same level of business with less money tied up in operations. …