Module IV: Working

Capital Management
Module IV: Working Capital
Management
• Working capital management: Concept of working capital, Need
for working capital, Types of working capital, Sources of
working capital, Management of Cash – Motives for holding
cash, Objectives of cash management – Management of
inventories – Kinds of inventories, Risks and costs associated
with inventories, Management of accounts receivables –
Purpose of receivables, Costs of maintaining receivables,
Factors affecting the size of receivables, Optimum size of
receivables
 Finance Functions and Decisions
Long-Term Financial Decisions:
•Investment Decision (Long-Term Asset-Mix): Determining where to
invest funds for maximum returns, such as in new projects, machinery, or
expansions.
•Financing Decision (Capital-Mix): Deciding how to raise funds (e.g.,
through equity, debt, or retained earnings) to finance investments.
•Dividend Decision (Profit Allocation): Deciding how much of the
earned profits should be distributed to shareholders as dividends versus
reinvested into the business.
Short-Term Financial Decisions:
•Liquidity Decision (Short-Term Asset-Mix): Managing the balance
between cash inflows (e.g., revenue) and outflows (e.g., expenses) to
ensure the firm can meet its immediate obligations and maintain
operational stability.
Working capital
management
Working Capital Management
• Ensures a business has sufficient short-term assets to cover its
short-term liabilities.
• Effective working capital management helps businesses
maintain liquidity, operational efficiency, and financial health.
• concerned with the problems that arise in attempting to manage
the current assets, the current liabilities and the interrelations
that exist between them.
Working Capital
• Working capital refers to the funds a company needs for its day-to-
day operations.
• It is the difference between a company's current assets and current
liabilities.

Current Assets: Cash, accounts receivable, inventory, and other

assets expected to be converted into cash within a year.
Current Liabilities: Short-term obligations like accounts payable,
short-term loans, and other debts due within a year.
• A positive working capital indicates that a company can meet its
short-term liabilities, whereas a negative working capital suggests
financial difficulties.
 Need for Working Capital
Companies require working capital for various reasons, including:
➢Operational Efficiency – Ensures smooth day-to-day
operations like paying suppliers and employees.
➢Liquidity Management – Maintains sufficient cash flow to
handle unexpected expenses.
➢Growth and Expansion – Supports increased production, new
investments, and expansion plans.
➢Seasonal Business Needs – Businesses with seasonal demand
fluctuations need extra working capital to manage peak periods.
➢Creditworthiness – A strong working capital position improves
a company’s credit rating, making it easier to secure loans.
Sources of working capital
 Spontaneous Sources of Working
Capital
• These sources arise automatically in the normal course of
business. They do not require explicit agreements and typically
fluctuate with business activity levels.
➤ Trade Credit
• Trade credit is credit extended by suppliers to businesses for the
purchase of goods and services. It includes:
• Sundry Creditors – Suppliers who allow delayed payment for
goods.
• Bills/Notes Payable – Legal obligations to pay suppliers at a
later date.
Example: A company purchases raw materials and agrees to pay
the supplier in 30 days.
➤ Short-Term Sources
• Short-term sources are used to finance day-to-day operations and typically
have a repayment period of less than a year.
Internal Sources (Within the Company)
• Provision for Tax – Setting aside money for tax payments.
• Provision for Dividend – Retaining funds to pay dividends to shareholders.
External Sources (Outside the Company)
• Bank Overdraft / Cash Credit – A business can withdraw more money than
available in its account up to a limit set by the bank.
• Trade Deposits – Advances received from customers for future supply of
goods/services.
• Public Deposits – Money borrowed from the general public at a fixed
interest rate.
• Bills Discounting – Selling accounts receivables (invoices) to
banks/financial institutions for immediate cash.
• Short-term Loans – Borrowing funds from banks or other financial
institutions for a short period.
➤ Long-Term Sources
• Long-term sources are used for expansion and growth and have
a repayment period of more than a year.
Internal Sources (Within the Company)
• Retained Profit – Profits kept in the business instead of
distributing them as dividends.
• Provision for Depreciation – Funds set aside to replace or
upgrade assets.
External Sources (Outside the Company)
• Share Capital – Money raised by issuing shares to investors.
• Long-term Loan – Borrowing from banks or financial
institutions for several years.
• Debentures – A form of long-term borrowing where a company
issues bonds to investors and promises to pay fixed interest.
Gross Working Capital (GWC)
• The total investment in current assets (cash, receivables, inventory,
etc.).
• Focus: Managing and financing current assets.
• Ex: A company’s cash reserves, accounts receivable, and inventory
are all part of its gross working capital.
Net Working Capital (NWC)
• The difference between current assets and current liabilities.

Positive NWC means a company can meet short-term obligations.

Negative NWC indicates liquidity problems.
• Example: If a firm has ₹1,00,000 in current assets and ₹60,000 in
current liabilities, its NWC = ₹40,000.
Permanent or Fixed Working Capital
The minimum level of current assets required for continuous business
operations.
• Example: A retail store always needing ₹2,00,000 worth of
inventory.
Subtypes of Permanent Working Capital:
[Link] Working Capital – Required for normal business
activities.
A bakery always needing flour and sugar to keep production
running.
[Link] Working Capital – Extra capital kept for unexpected
situations.
A manufacturing company keeping funds for unexpected machine
breakdowns.
Temporary Working Capital
• Temporary working capital (also called variable working
capital) refers to the extra working capital a business requires
seasonally or occasionally to meet short-term operational
needs.
• A retail store needs extra inventory and staff during festival
seasons like Diwali or Christmas.
• An ice cream manufacturer requires more raw materials and
production capacity in summer but not in winter.
Management of Cash
Management of Cash
• Cash is the most liquid asset and is crucial for the smooth
operation of a business.
• Efficient cash management ensures that a company has enough
cash to meet its obligations while minimizing idle cash that does
not generate returns.
Motives for Holding Cash
Motives for Holding Cash
Companies hold cash for different reasons, which can be
categorized into four main motives:
Transaction Motive
• Businesses need cash to meet their day-to-day expenses like
salaries, rent, utilities, and raw material purchases.
• Cash is required because payments and receipts may not always
match in timing.
• Example: A company receives customer payments at the end of
the month but needs to pay wages weekly.
Precautionary Motive
• Firms keep extra cash as a buffer to handle unexpected expenses
or financial uncertainties.
• This is like an "emergency fund" to cover sudden costs such as
repairs, economic downturns, or unexpected supplier price
increases.
Example: A company keeps extra cash in case of unexpected
machine breakdowns.
Speculative Motive
• Cash is held to take advantage of investment opportunities
that may arise.
• This includes purchasing raw materials at a discount, acquiring
assets at a lower price, or making strategic business acquisitions.
• Example: A business keeps cash available to buy raw materials
in bulk at a discount when prices drop.
Objectives of Cash Management
• Effective cash management helps businesses maintain liquidity,
optimize cash flow, and maximize profitability. The key
objectives are:
1. Ensuring Liquidity
• The company should have enough cash to meet short-term
obligations like paying salaries, suppliers, and loan interest.
• Avoids the risk of financial distress or bankruptcy due to cash
shortages.
2. Minimizing Idle Cash
• Holding too much cash results in lost opportunities because
cash does not earn a high return.
• Excess cash should be invested in short-term securities to earn
interest.
• Investing in Treasury bills or money market funds instead of
keeping cash in a non-interest-bearing account.
3. Optimizing Cash Flow
• Companies must coordinate cash inflows and outflows to ensure
they do not run out of cash at any given time.
• This includes timely collection of receivables and delaying
payments strategically without harming business relationships.
• Offering early payment discounts to customers to encourage
faster payments.
4. Reducing the Cost of Borrowing
• If a company manages its cash efficiently, it does not have to rely
on short-term borrowing (which comes with interest costs).
• Effective cash planning reduces reliance on overdrafts or
emergency loans.
5. Preventing Fraud and Misuse
• Having strict cash management policies helps prevent fraud,
misappropriation, or misuse of funds.
• Businesses use internal controls, such as requiring two approvals
for large transactions
6. Maximizing Profitability
• Businesses aim to invest excess cash wisely to generate returns
without compromising liquidity.
• This means investing in low-risk, high-liquidity investments
that provide a return while keeping cash accessible.
• A company may invest in short-term government securities that
can be easily converted to cash.
Cash Forecasting and Budgeting
• Cash Forecasting and Budgeting involves predicting cash
inflows and outflows to plan and control financial resources.
• The cash budget is a key tool that helps financial managers
determine future cash needs, manage financing, and maintain
liquidity.
 Types of Cash Forecasting:
[Link]-term Cash Forecasting (for weeks or months):
• Determines operating cash requirements.
• Helps anticipate short-term financing needs.
• Manages surplus cash investments.
Methods:
1. Receipts and Disbursements Method: Tracks cash inflows and outflows for
better control.
2. Adjusted Net Income Method: Estimates working capital and financing needs
over longer durations.
2. Long-term Cash Forecasting (for years):
• Identifies future financial and working capital needs.
• Helps evaluate capital projects and their financial impact.
• Enhances corporate planning by compelling divisions to plan ahead.
Managing Cash Collections and
Disbursements
• After preparing the cash budget, financial managers must
ensure minimal deviation between projected and actual cash
flows. This requires efficient cash collection and disbursement
control.
 Accelerating Cash Collections
Firms can conserve cash and reduce cash balance requirements by
speeding up cash collections.
Delays may arise from slow invoice processing, extended payment
periods by buyers (especially government agencies), and clearing
system inefficiencies.
Cash Collection Instruments in India:
[Link]
[Link]
[Link] Bills
[Link] Bills
[Link] of Credit
1. Cheques
A cheque is a written order directing a bank to pay a specific
amount of money from a person's or company’s account to
another party.
It is one of the most common payment instruments in business
transactions.
• Types of Cheques:
• Bearer Cheque – Can be encashed by anyone holding it.
• Order Cheque – Can only be encashed by the person whose name is
written on the cheque.
• Crossed Cheque – Cannot be directly encashed; must be deposited in
a bank account.
• Post-Dated Cheque – Dated for a future date and can only be
encashed on or after that date.
2. Drafts (Demand Draft - DD)
A draft or demand draft (DD) is a prepaid negotiable instrument
issued by a bank, ensuring payment to a specified person or
entity.
It is safer than a cheque as it cannot bounce due to insufficient
funds.
• Key Features:
• Issued by a bank after receiving the payment in advance.
• Can be used for secure business transactions.
• Used when the payee does not want to risk non-payment.
3. Documentary Bills
A documentary bill is a bill of exchange that is accompanied by
documents proving that the goods have been shipped or
delivered.
It is mainly used in international trade to ensure the buyer
receives the goods and the seller receives the payment.
• Types of Documentary Bills:
• Documents Against Payment (D/P) – Buyer must pay immediately
upon receiving the documents.
• Documents Against Acceptance (D/A) – Buyer accepts the bill and
agrees to pay on a future date.
4. Trade Bills
A trade bill is a negotiable instrument used in trade transactions.
It acts as a written promise from a buyer to pay the seller on a
specified date.
Trade bills help businesses manage credit sales and ensure
payment collection.
• Key Features:
• Used for commercial transactions between businesses.
• Helps sellers manage credit sales and secure future payments.
• Can be discounted at banks to get immediate cash.
5. Letter of Credit (LC)
A Letter of Credit (LC) is a guarantee issued by a bank on behalf
of a buyer, ensuring that the seller will receive payment upon
fulfilling agreed conditions.
It is widely used in international trade to minimize payment
risks.
• Types of Letters of Credit:
• Revocable LC – Can be changed or canceled by the issuing bank
without prior notice.
• Irrevocable LC – Cannot be altered without the agreement of all
parties.
• Confirmed LC – A second bank (apart from the issuing bank)
guarantees the payment.
• Standby LC – Acts as a backup in case the buyer fails to pay.
Disbursement or Payment Float
• Some firms use "playing the float" to maximize available
funds.
• The disbursement float is the difference between the firm's actual
bank balance and the balance shown in its books, caused by
transit and processing delays in cheque clearance.
• Suppose ABC Ltd. has a bank balance of ₹10 lakh. The company
issues cheques worth ₹5 lakh to suppliers, but these cheques take
3 days to clear.
• During this period, the company's books show a balance of ₹5
lakh, but the actual bank balance remains ₹10 lakh until the
cheques are processed.
• Meanwhile, if ABC Ltd. earns interest on the ₹5 lakh during the
float period or uses it for other short-term investments, the
company benefits from playing the float.
Controlling Disbursements
• Firms can conserve cash by managing payments efficiently.
• Payments should be made within credit terms but not earlier
than required to maximize the use of trade credit (an interest-
free funding source).
Management of
Inventories
 Introduction
• Inventories form a significant part of current
assets in Indian companies, averaging 60% of
total current assets.
• Effective inventory management prevents
unnecessary investment, ensuring profitability
and sustainability.
• Companies can reduce inventory levels by 10-
20% without affecting production and sales
through inventory planning and control
techniques.
Nature of Inventories
• Inventories include raw materials, work-in-process, and
finished goods in manufacturing firms.
• Raw Materials – Basic inputs stored for future production.
• Work-in-Process – Semi-manufactured products undergoing further
production.
• Finished Goods – Ready-to-sell products stored for customer
demand.
• Supplies and spares like maintenance materials are also
maintained but have less financial significance.
Need to Hold Inventories
Companies hold inventories due to three main reasons:
[Link] Motive – Ensuring smooth production and sales
operations.
[Link] Motive – Protecting against uncertainties in
supply and demand.
[Link] Motive – Taking advantage of price fluctuations
and bulk discounts.
Reasons for Maintaining Different
Inventories
• Raw Materials: Required for uninterrupted production due to
supply chain uncertainties.
• Work-in-Process: Exists due to the production cycle, which
firms aim to minimize.
• Finished Goods: Held to ensure continuous sales and meet
sudden customer demand.
Risks of Holding Excessive
Inventories
• Higher storage and handling costs reduce profitability.
• Liquidity risks – Inventories may become difficult to sell,
leading to financial strain.
• Obsolescence & deterioration – Products may become
outdated or physically degrade over time.
Risks of Holding Inadequate Inventories
• Production stoppages due to insufficient raw materials.
• Loss of customers if finished goods are unavailable when
demanded.
Inventory Management Techniques

• Inventory management techniques help firms optimize

inventory levels to balance costs and ensure smooth operations.
• The primary goal is to maximize shareholder wealth by
maintaining an optimal inventory level—avoiding both excessive
stock and shortages.
• Poor inventory management can lead to inflexibility, lost sales,
and unnecessary costs.
Questions in Inventory
Management:
[Link] much should be ordered?
• Determining the Economic Order Quantity (EOQ)—the ideal
quantity of stock that minimizes total inventory costs, including
ordering and holding costs.
[Link] should it be ordered?
• Identifying the Reorder Point—the inventory level at which a new
order should be placed to avoid stockouts, considering lead time and
demand uncertainty.
• Efficient inventory management ensures that the company has
the right quantity of stock at the right time while minimizing
costs and maximizing profitability.
What is EOQ?
Economic Order Quantity (EOQ) is the optimal order quantity
that minimizes the total inventory cost by balancing ordering
costs and carrying costs.
Components of EOQ:
[Link] Cost (O) – The cost incurred every time an order is
placed (e.g., administrative costs, shipping fees).
[Link]/Holding Cost (H) – The cost of holding inventory
(e.g., storage, insurance, depreciation).
EOQ Formula:
How EOQ Works
• If you order too frequently,
you incur high ordering
costs.
• If you order in large
quantities, you incur high
holding costs.
• EOQ helps find the right
balance, ensuring cost
efficiency.
Why is EOQ Important?
• Reduces total inventory costs.
• Improves efficiency in inventory management.
• Helps businesses maintain the right stock levels.
Q1
EOQ for a Retail Store
• A retail store sells 10,000 units of a product annually. The
ordering cost per order is ₹500, and the holding cost per unit
per year is ₹2. Find the EOQ.
Q2
A manufacturer requires 50,000 components per year. The cost
per order is ₹1,000, and the holding cost per unit per year is ₹5.
Calculate the EOQ.
• Solution:
Q3
A pharmacy sells 2,400 bottles of cough syrup annually. The
ordering cost is ₹300 per order, and the holding cost is ₹4 per
bottle per year. Find the EOQ.
• Solution:
Q4
A factory uses 12,000 meters of fabric annually. The ordering cost
is ₹2,000 per order, and the holding cost is ₹8 per meter per
year. Compute the EOQ.
• Solution:
Reorder Point (ROP)
• The Reorder Point (ROP) helps a business determine when to
place an order so that inventory is replenished before it runs
out. It ensures a smooth supply of materials, avoiding stockouts
that could disrupt operations.
Components of Reorder Point:
[Link] Time (L) – The time taken to receive inventory after
placing an order.
[Link] Usage (U) – The typical rate at which inventory is
consumed per unit of time.
[Link] Order Quantity (EOQ) – The optimal order
quantity that minimizes total inventory costs.
[Link] Stock (SS) – Extra inventory kept to prevent
stockouts due to unexpected delays or demand surges.
Inventory Control Systems
• An inventory control system helps firms efficiently manage their
stock.
• The choice of a system depends on the nature and size of the
business.
• Small firms may use simple methods like the two-bin system,
while large businesses require computerized tracking.
1. ABC Inventory Control System
This method classifies inventory into three categories based on
value and importance:
• A Items: High-value items (tightest control).
• B Items: Medium-value items (moderate control).
• C Items: Low-value items (simpler control).
This approach, also known as Control by Importance and
Exception (CIE), ensures companies focus resources on the
most valuable stock.
2. Just-in-Time (JIT) System
• Popularized by Japanese firms, JIT ensures that raw materials
or components arrive just before they are needed in production.
• This reduces inventory carrying costs and improves efficiency.
• However, it requires strong supplier coordination and high-
quality materials to prevent production delays.
Management of accounts
receivables
Trade Credit and Receivables
Management
• Trade credit arises when a firm sells goods or services on credit
instead of receiving immediate cash.
• It is an important marketing tool that helps businesses compete
and attract customers.
• However, it leads to accounts receivable (trade debtors/ book
debts), which need to be collected in the future.
Characteristics of credit sales
A credit sale has three key characteristics:
[Link] – Unlike cash sales, credit sales involve the risk of non-
payment.
[Link] Value – The buyer receives goods/services
immediately, while the seller expects payment later.
[Link] – The payment is made in the future, impacting cash
flow.
Credit Policy Variables
A firm's credit policy consists of three key decisions:
[Link] Standards – Defines which customers qualify for credit.
• Stricter standards → Fewer slow-paying customers, lower risk but fewer
sales.
• Lenient standards → More customers, but higher risk of delayed payments
and defaults.
[Link] Terms – Specifies the credit duration and payment
conditions.
• Longer credit terms increase receivables investment but may boost sales.
• Shorter credit terms reduce receivables investment but might discourage
customers.
[Link] Efforts – Determines how actively a firm follows up on
payments.
• Strict collection policies → Reduce receivables investment.
• Lenient collection policies → Increase receivables investment but may
improve customer relations.
Purpose of Receivables
Firms extend credit to customers for various reasons:
• Increase Sales – Credit sales attract more customers,
boosting revenue.
• Competitive Advantage – A flexible credit policy makes a
company more appealing compared to competitors with stricter
payment terms.
• Customer Relationships – Offering credit builds loyalty and
long-term relationships.
• Market Expansion – Businesses can tap into new customer
segments who may not have immediate cash availability.
Costs of Maintaining Receivables
Granting credit leads to certain costs, which must be weighed against
the benefits:
• Financing Costs – Maintaining receivables ties up capital, which
could have been invested elsewhere. The company may need to
borrow funds, leading to interest costs.
• Administrative Costs – Includes expenses related to credit
approval, billing, and record-keeping.
• Bad Debts – Some customers may default, leading to losses.
• Collection Costs – Expenses related to reminding, following up,
or even legal actions to recover payments.
• Opportunity Cost – Money locked in receivables cannot be used
for other business activities like expansion or investment.
Factors Affecting the Size of
Receivables
The amount of receivables a company holds depends on several factors:
• Credit Policy – A lenient policy increases receivables, while a strict one
keeps them low.
• Credit Terms – Longer credit periods (e.g., 60 days instead of 30)
increase receivables. Discounts for early payments reduce them.
• Collection Efficiency – Faster and stricter collections keep receivables
lower.
• Sales Volume – Higher sales naturally lead to more receivables,
especially if most sales are on credit.
• Industry Norms – Some industries (e.g., wholesale trade) operate on
longer credit cycles, leading to higher receivables.
• Economic Conditions – In a recession, customers may delay payments,
increasing receivables.
• Customer Creditworthiness – A customer base with strong financial
health reduces default risks and improves collection speed.
Optimum Size of Receivables
The goal is to maintain an optimal level of receivables—enough to
boost sales without causing liquidity issues.
• Not Too High – Large receivables increase financing costs and
the risk of bad debts.
• Not Too Low – Extremely low receivables may indicate missed
sales opportunities due to an overly strict credit policy.
• Balancing Trade-Offs – Firms should analyze whether the
return from additional sales due to relaxed credit terms exceeds
the cost of maintaining receivables.
How to Determine Optimum
Receivables?
• Cost-Benefit Analysis – Compare the profits from extra
credit sales with the costs of maintaining those receivables.
• Aging Analysis – Regularly reviewing outstanding receivables
helps ensure timely collections.
• Monitoring Key Ratios – The Accounts Receivable Turnover
Ratio and Days Sales Outstanding (DSO) help track efficiency.
Problems
Working Capital
Requirement
 Q1
Prepare an estimate of working capital requirement from the following
information of a trading concern.
Given the following information:
• Annual Sales = 1,00,000 units
• Selling Price per unit = ₹8
• Net Profit Margin = 25%
• Credit Period to Customers = 8 weeks
• Credit Period from Suppliers = 4 weeks
• Stockholding Period = 12 weeks
• Contingencies = 10%
Solution
• Working Note 1: Sales, Profit, and Cost of Sales Calculation

• Working Note 2: Stock, Debtors, and Creditors Calculation

Working Capital Calculation
Q2
• Annual sales-

Net Profit (22%)

Cost of sales-
Estimate of Working Capital
Requirements
Cash Budget
Cash budget
• A cash budget is a financial tool used by businesses and
individuals to estimate cash inflows and outflows over a specific
period.
• It helps in managing liquidity, ensuring that enough cash is
available to meet obligations.
Example of a Cash Budget (for 3 months)
• Beginning Cash Balance: ₹5,00,000
• Monthly Cash Sales: ₹3,00,000, ₹4,00,000, ₹5,50,000
• Collections from Receivables: ₹2,00,000, ₹3,00,000,
₹2,50,000
• Other Cash Inflows: ₹1,00,000 each month
• Payments to Suppliers: ₹2,50,000, ₹3,00,000, ₹3,50,000
• Operating Expenses: ₹2,00,000, ₹2,50,000, ₹3,00,000
• Loan Repayments: ₹50,000 each month
• Other Cash Outflows: ₹1,00,000 each month
Wrong Answer
Particulars Month 1 (₹) Month 2 (₹) Month 3 (₹)
Beginning Cash
5,00,000 6,00,000 7,00,000
Balance
Cash Inflows
Cash Sales 3,00,000 4,00,000 5,50,000
Collections from
2,00,000 3,00,000 2,50,000
Receivables
Other Cash Inflows 1,00,000 1,00,000 1,00,000
Total Cash Available 11,00,000 14,00,000 16,00,000
Cash Outflows
Payments to Suppliers 2,50,000 3,00,000 3,50,000
Operating Expenses 2,00,000 2,50,000 3,00,000
Loan Repayments 50,000 50,000 50,000
Other Cash Outflows 1,00,000 1,00,000 1,00,000
Total Cash Outflows 6,00,000 7,00,000 8,00,000
Ending Cash Balance 5,00,000 7,00,000 8,00,000
Right Answer
 Q2
Based on the following information, prepare a Cash Budget for ABC
Ltd.
Particulars 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Opening Cash
₹10,000
Balance
Collection from
₹1,25,000 ₹1,50,000 ₹1,60,000 ₹2,21,000
Customers
Purchase of
₹20,000 ₹35,000 ₹35,000 ₹54,200
Materials
Other Expenditure ₹25,000 ₹20,000 ₹20,000 ₹17,000

Salary and Wages ₹90,000 ₹95,000 ₹95,000 ₹1,09,200

Income Tax ₹5,000 - -
Purchase of
- - - ₹20,000
Machinery
Additional Information:
The company desires to maintain a minimum cash balance of
₹15,000 at the end of each quarter.
• Borrowing & Repayment: Cash can be borrowed or repaid in
multiples of ₹500 at an interest rate of 10% per annum.
• Management Policy:
• Borrow only what is necessary.
• Repay as early as possible.
• No loans should extend beyond four quarters.
• Interest Computation: Interest is computed and paid only when
the principal is repaid.
• Loan Timing: Borrowing occurs at the beginning of the quarter,
and repayments (including interest) occur at the end of the
quarter.
Interest calculation
Q3
Cash Budget for July to September 2021
EOQ and different levels
Reorder Quantity
•This refers to the quantity of materials ordered when stock reaches the
reorder level.
•EOQ and Reorder Quantity are often the same, but not always. Reorder
Quantity depends on demand variability, lead time fluctuations, and
safety stock considerations.
Q1
Q2
Q3
• EOQ
• Reorder Point (ROP)
Q4
Answer
• (1) Economic Order Quantity (EOQ)
• (2) Reorder Point
Q5
(i) EOQ (Economic Order Quantity)

(ii) Number of Orders per Annum

(iii) Time Between Two Orders