Which of the following pairs is correctly matched?

Answer & explanation

Correct answer: option 4

The correct answer is Option (4) → Lead time - The time lag between the placement of an order and the actual receipt of materials

Option (1) Operating efficiency - A liberal credit policy that results in a higher amount of debtors — Incorrect. A liberal credit policy with more debtors is credit allowed. Operating efficiency means handling stock, debtors and sales well, which lowers working capital.

Option (2) Credit availed - The credit terms that a firm allows to its customers — Incorrect. Terms allowed to customers are credit allowed. Credit availed is the credit a firm gets from its suppliers, which reduces working capital.

Option (3) Net working capital - The excess of current liabilities over current assets — Incorrect. The two sides are reversed. Net working capital is the excess of current assets over current liabilities.

Option (4) Lead time - The time lag between the placement of an order and the actual receipt of materials — Correct. Lead time is the gap between ordering materials and receiving them. A longer lead time means more material must be stored, so more working capital is needed.

NCERT (2026-27 Edition): “Working Capital … Some part of current assets is usually financed through short-term sources, i.e., current liabilities. The rest is financed through long-term sources and is called net working capital. Thus, NWC = CA – CL (i.e. Current Assets - Current Liabilities.) Thus, net working capital may be defined as the excess of current assets over current liabilities.”

“6. Credit Allowed: Different firms allow different credit terms to their customers. These depend upon the level of competition that a firm faces as well as the credit worthiness of their clientele. A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital.”

“7. Credit Availed: Just as a firm allows credit to its customers it also may get credit from its suppliers. To the extent it avails the credit on purchases, the working capital requirement is reduced.”

“9. Availability of Raw Material: If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. If, however, raw materials do not have a record of un-interrupted availability, higher stock levels may be required. In addition, the time lag between the placement of order and the actual receipt of the materials (also called lead time) is also relevant. Larger the lead time, larger the quantity of material to be stored and larger shall be the amount of working capital required.”