Impact of Working Capital DriversWhich of the following statement(s) is true?Improvement of production processes will help pile a lot of inventory in the warehouse, thus increasing the operating working capital requirement. Timely reminders to customers who owe money to the company will help in better receivables management, thus decreasing the operating working capital requirement. If the payment habit of a company is to provide long payment terms to the customers, the operating working capital requirement will decrease.
Question
Impact of Working Capital DriversWhich of the following statement(s) is true?Improvement of production processes will help pile a lot of inventory in the warehouse, thus increasing the operating working capital requirement. Timely reminders to customers who owe money to the company will help in better receivables management, thus decreasing the operating working capital requirement. If the payment habit of a company is to provide long payment terms to the customers, the operating working capital requirement will decrease.
Solution
The second statement is true. Timely reminders to customers who owe money to the company will indeed help in better receivables management, thus decreasing the operating working capital requirement.
The first statement is not necessarily true. While improving production processes may lead to an increase in inventory, it does not necessarily mean that this will increase the operating working capital requirement. In fact, improved production processes could lead to more efficient use of resources, potentially reducing the working capital requirement.
The third statement is also not necessarily true. Providing long payment terms to customers could actually increase the operating working capital requirement, as the company would need to have sufficient capital to cover its own expenses while waiting for payment from customers.
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