Question

Explain any four factors that can affect the working capital requirement of a company.

Answer 1

Answer:

1) Length of Operating Cycle: The amount of working capital directly depends upon the length of operating cycle

2) Nature of Business.

3) Scale of Operation.

4) Business Cycle Fluctuation.

5) Seasonal Factors.

6) Technology and Production Cycle.

7) Credit Allowed.

8) Credit Avail.

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Answer 2

Answer:

(i) Length of operating cycle/Production cycle: Operating cycle refers to the length of the manufacturing cycle, i.e. the periods taken to convert raw materials into finished products. Longer period means more working capital is required and vice-versa.

(ii) Credit policy/Credit allowed: If liberal credit terms are given and a liberal policy is followed, then the company would require more working capital as there is less cash inflow and vice-versa.

(iii) Nature of business: Manufacturing firm requires high amount of working capital as compared to a trading organisation, to convert raw materials into finished goods.

(iv) Scale of operations: Large amount of working capital is required by firms operating on a large scale of operations in terms of debt, inventory, etc. as compared to small scale firms.

(v) Seasonal factor: Higher amount of working capital is required by the organisation during its peak season as the level of activities is higher as compared to lean season.

(vi) Business cycle: During boom period, when sales are high, higher amount of working capital is required as compared to depression period.

(vii) Credit availed: If it is difficult to avail credit by the firm (on its purchases) from suppliers then, higher amount of working capital is required.

(viii) Available of raw material: Higher lead time (i.e. time lag between the placement of order and actual receipt of the materials) and interrupted availability of raw materials will raise the requirement of working capital.

(ix) Operating efficiency: Less requirements of working capital will be there in a firm in the presence of best sales efforts, ideal debtors turnover ratio and higher inventory turnover ratio.

(x) Level of competition: Working capital requirements will be more if level of competitions is high.

(xi) Inflation: At a higher rate of inflation, working capital requirement will also be higher.

(xii) Growth prospects: If an organisation has planned for higher growth prospects then its requirement for working capital will be higher.