Question
Explain the role of ‘Operating Efficiency’ in determining the amount of working capital.
Solution
Operating efficiency means completing the various business operations efficiently. Operating efficiency of every organisation happens to be different. Some such examples are: (i) Converting raw material into finished goods at the earliest, (ii) Selling the finished goods quickly, and (iii) Quickly getting payments from the debtors. A company which has a better operating efficiency has to invest less in stock and the debtors. Therefore, it requires less working capital, while the case is different in respect of companies with less operating efficiency.
