Cong answer questions
1. What is working capital? How is it calculated? Discuss five important
determinants of working capital requirement.
Answers
Answer:
Meaning: It refers to the excess of current assets over current liabilities.
Computation: Net Working Capital = Current Assets - Current Liabilities.
Determinants: The following factors affect the requirement of working capital:
(i) Scale of Operations: There is a direct link between the working capital and the scale of operations. In other words, more working capital is required in case of big organisations while less working capital is needed in case of small organisations.
(ii) Business Cycle: The need for the working capital is affected by various stages of the business cycle. During the booming period, the demand of a product increases and sales also increase. Therefore, more working capital is needed. On the contrary, during the period of depression, the demand declines and it affects both the production and sale of goods. Therefore in such a situation, less working capital is required.
(iii) Production Cycle: By production cycle is meant the time involved in converting raw material into finished product. Longer this period, more will be the time for which the capital remain blocked in raw material and semi-manufactured products. Thus, more working capital will be needed. On the contrary, where period of production cycle is little, less working capital will be needed.
(iv) Credit Allowed: Those enterprises which sell goods on cash payment basis need little working capital but those who provide credit facilities to the customers need more working capital.
(v) Credit Availed: If raw material and other inputs are easily available on credit, less working capital is needed. On the contrary, if these things are not available on credit, then to make cash payment quickly, large amount of working capital will be needed.