Sunil Ltd., a manufacturer, improves its sales effort. Its finished goods are now held in stock for a shorter average time before they are sold. Which of the following correctly describes this change?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → It shows the operating efficiency of the firm, and it lowers its working capital requirement.
Option (1) It shows a shorter production cycle of the firm, and it lowers its working capital requirement. — Incorrect. The production cycle is the time from receiving raw material to turning it into finished goods. The time finished goods wait in stock comes after this cycle is over, so it is not part of it.
Option (2) It shows the operating efficiency of the firm, and it raises its working capital requirement. — Incorrect. The factor is right, but the effect is reversed. Goods that sell faster leave less stock to finance, so the requirement falls.
Option (3) It shows the operating efficiency of the firm, and it lowers its working capital requirement. — Correct. Operating efficiency is how well a firm manages its operations. Better sales effort cuts the time finished goods stay in stock. Less money is then locked up in stock, so the firm needs less working capital.
Option (4) It shows a shorter production cycle of the firm, and it raises its working capital requirement. — Incorrect. Both parts are wrong. The holding time of finished goods is not part of the production cycle. Also, a shorter holding time lowers the requirement.
NCERT (2026-27 Edition): “5. Production Cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. …” “8. Operating Efficiency: Firms manage their operations with varied degrees of efficiency. For example, a firm managing its raw materials efficiently may be able to manage with a smaller balance. This is reflected in a higher inventory turnover ratio. Similarly, a better debtors turnover ratio may be achieved reducing the amount tied up in receivables. Better sales effort may reduce the average time for which finished goods inventory is held. Such efficiencies may reduce the level of raw materials, finished goods and debtors resulting in lower requirement of working capital.” |