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Business Studies · 2023 · 3 marks
CBSE 2023 · Region 2 · Set 2 · Q24
(a) Explain the twin objectives of Financial Planning.
(a)
Explain the twin objectives of Financial
Planning.
OR
(b)
State any three factors that determine the
requirement of working capital of a company.
Marking-scheme solution
Objectives of financial planning (with explanation):
(i)
To ensure availability of funds whenever required:
(ii)
To see that the firm does not raise resources
unnecessarily
Factors affecting working capital requirements of
a company :
The nature of a business as a trading organisation
usually needs a smaller amount of working capital
compared to a manufacturing organisation. Service
industries which usually do not have to maintain
inventory require less working capital.
Scale of operation as organisations which operate on a
higher scale of operation require large amount of
working capital as compared to the organisations
which operate on a lower scale.
Different phases of business cycles affect the
requirement of working capital by a firm as in case
of a boom, larger amount of working capital is
required while during depression, it will be
comparatively low.
Seasonality in operations affects working capital
requirements as in peak season, larger amount of
working capital is required while it will be lower
during the lean season.
Working capital requirement is higher in firms with
longer production cycle and lower in firms with
shorter production cycle.
A liberal credit policy results in higher amount of
debtors, increasing the requirement of working
capital.
To the extent a firm avails the credit on purchases from
its suppliers, the working capital requirement is
reduced.
Operating efficiency affects the requirement of working
capital as firms which manage their operations
efficiently may reduce the level of raw materials,
finished goods and debtors resulting in lower
requirement of working capital.
Free and continuous availability of raw material will
reduce the requirement of working capital whereas
larger time lag between placement of order and
receipt of material will lead to requirement of larger
working capital.
If a firm has higher growth prospects, it will require
larger amount of working capital so that it is able to
meet higher production and sales target whenever
required.
Higher level of competition may necessitate larger
stocks of finished goods to meet urgent orders from
customers, thereby, increasing the working capital
requirement.
The working capital requirement of a business become
higher with higher rate of inflation.
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CBSE Class 12 Business Studies past-paper question from the 2023 board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.