Question

Explain: factors affecting the Working Capital requirement of firm on the basis

of:

Business cycle, Availability of raw materials and Seasonal factor. ​

Answer 1

Fᴀᴄᴛᴏʀs ᴀғғᴇᴄᴛɪɴɢ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ :

Fᴀᴄᴛᴏʀs ᴀғғᴇᴄᴛɪɴɢ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ :Nᴀᴛᴜʀᴇ ᴏғ Bᴜsɪɴᴇss

Fᴀᴄᴛᴏʀs ᴀғғᴇᴄᴛɪɴɢ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ :Nᴀᴛᴜʀᴇ ᴏғ BᴜsɪɴᴇssTʜᴇ ʙᴀsɪᴄ ɴᴀᴛᴜʀᴇ ᴏғ ᴀ ʙᴜsɪɴᴇss ɪɴғʟᴜᴇɴᴄᴇs ᴛʜᴇ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ. A ᴛʀᴀᴅɪɴɢ ᴏʀɢᴀɴɪsᴀᴛɪᴏɴ ᴀɴᴅ ᴀ sᴇʀᴠɪᴄᴇ ɪɴᴅᴜsᴛʀʏ ғɪʀᴍ ᴜsᴜᴀʟʟʏ ɴᴇᴇᴅs ᴀ sᴍᴀʟʟᴇʀ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ᴀs ᴄᴏᴍᴘᴀʀᴇᴅ ᴛᴏ ᴀ ᴍᴀɴᴜғᴀᴄᴛᴜʀɪɴɢ ᴏʀɢᴀɴɪsᴀᴛɪᴏɴ. -

Fᴀᴄᴛᴏʀs ᴀғғᴇᴄᴛɪɴɢ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ :Nᴀᴛᴜʀᴇ ᴏғ BᴜsɪɴᴇssTʜᴇ ʙᴀsɪᴄ ɴᴀᴛᴜʀᴇ ᴏғ ᴀ ʙᴜsɪɴᴇss ɪɴғʟᴜᴇɴᴄᴇs ᴛʜᴇ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ. A ᴛʀᴀᴅɪɴɢ ᴏʀɢᴀɴɪsᴀᴛɪᴏɴ ᴀɴᴅ ᴀ sᴇʀᴠɪᴄᴇ ɪɴᴅᴜsᴛʀʏ ғɪʀᴍ ᴜsᴜᴀʟʟʏ ɴᴇᴇᴅs ᴀ sᴍᴀʟʟᴇʀ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ᴀs ᴄᴏᴍᴘᴀʀᴇᴅ ᴛᴏ ᴀ ᴍᴀɴᴜғᴀᴄᴛᴜʀɪɴɢ ᴏʀɢᴀɴɪsᴀᴛɪᴏɴ. - Sᴄᴀʟᴇ ᴏғ Oᴘᴇʀᴀᴛɪᴏɴs

Fᴀᴄᴛᴏʀs ᴀғғᴇᴄᴛɪɴɢ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ :Nᴀᴛᴜʀᴇ ᴏғ BᴜsɪɴᴇssTʜᴇ ʙᴀsɪᴄ ɴᴀᴛᴜʀᴇ ᴏғ ᴀ ʙᴜsɪɴᴇss ɪɴғʟᴜᴇɴᴄᴇs ᴛʜᴇ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ. A ᴛʀᴀᴅɪɴɢ ᴏʀɢᴀɴɪsᴀᴛɪᴏɴ ᴀɴᴅ ᴀ sᴇʀᴠɪᴄᴇ ɪɴᴅᴜsᴛʀʏ ғɪʀᴍ ᴜsᴜᴀʟʟʏ ɴᴇᴇᴅs ᴀ sᴍᴀʟʟᴇʀ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ᴀs ᴄᴏᴍᴘᴀʀᴇᴅ ᴛᴏ ᴀ ᴍᴀɴᴜғᴀᴄᴛᴜʀɪɴɢ ᴏʀɢᴀɴɪsᴀᴛɪᴏɴ. - Sᴄᴀʟᴇ ᴏғ OᴘᴇʀᴀᴛɪᴏɴsOʀɢᴀɴɪsᴀᴛɪᴏɴs ᴡʜɪᴄʜ ᴏᴘᴇʀᴀᴛᴇ ᴏɴ ᴀ ʟᴀʀɢᴇ sᴄᴀʟᴇ, ᴛʜᴇɪʀ ϙᴜᴀɴᴛᴜᴍ ᴏғ ɪɴᴠᴇɴᴛᴏʀʏ ᴀɴᴅ ᴅᴇʙᴛᴏʀs ʀᴇϙᴜɪʀᴇᴅ ɪs ɢᴇɴᴇʀᴀʟʟʏ ʜɪɢʜ. Sᴜᴄʜ ᴏʀɢᴀɴɪsᴀᴛɪᴏɴs, ᴛʜᴇʀᴇғᴏʀᴇ, ʀᴇϙᴜɪʀᴇ ʟᴀʀɢᴇ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ᴀs ᴄᴏᴍᴘᴀʀᴇᴅ ᴛᴏ ᴛʜᴇ ᴏʀɢᴀɴɪsᴀᴛɪᴏɴs ᴡʜɪᴄʜ ᴏᴘᴇʀᴀᴛᴇ ᴏɴ ᴀ ʟᴏᴡᴇʀ sᴄᴀʟᴇ.

Bᴜsɪɴᴇss Cʏᴄʟᴇ

Bᴜsɪɴᴇss CʏᴄʟᴇDɪғғᴇʀᴇɴᴛ ᴘʜᴀsᴇs ᴏғ ʙᴜsɪɴᴇss ᴄʏᴄʟᴇs ᴀғғᴇᴄᴛ ᴛʜᴇ ʀᴇϙᴜɪʀᴇᴍᴇɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ʙʏ ᴀ ғɪʀᴍ. Iɴ ᴄᴀsᴇ ᴏғ ᴀ ʙᴏᴏᴍ, ᴛʜᴇ sᴀʟᴇs ᴀs ᴡᴇʟʟ ᴀs ᴘʀᴏᴅᴜᴄᴛɪᴏɴ ᴀʀᴇ ʟɪᴋᴇʟʏ ᴛᴏ ʙᴇ ʟᴀʀɢᴇʀ ᴀɴᴅ, ᴛʜᴇʀᴇғᴏʀᴇ, ʟᴀʀɢᴇʀ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ɪs ʀᴇϙᴜɪʀᴇᴅ. As ᴀɢᴀɪɴsᴛ ᴛʜɪs, ᴛʜᴇ ʀᴇϙᴜɪʀᴇᴍᴇɴᴛ ғᴏʀ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ᴡɪʟʟ ʙᴇ ʟᴏᴡᴇʀ ᴅᴜʀɪɴɢ ᴛʜᴇ ᴘᴇʀɪᴏᴅ ᴏғ ᴅᴇᴘʀᴇssɪᴏɴ, sɪɴᴄᴇ ᴛʜᴇ sᴀʟᴇs ᴀs ᴡᴇʟʟ ᴀs ᴘʀᴏᴅᴜᴄᴛɪᴏɴ ᴡɪʟʟ ʙᴇ ʟᴇss.

Bᴜsɪɴᴇss CʏᴄʟᴇDɪғғᴇʀᴇɴᴛ ᴘʜᴀsᴇs ᴏғ ʙᴜsɪɴᴇss ᴄʏᴄʟᴇs ᴀғғᴇᴄᴛ ᴛʜᴇ ʀᴇϙᴜɪʀᴇᴍᴇɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ʙʏ ᴀ ғɪʀᴍ. Iɴ ᴄᴀsᴇ ᴏғ ᴀ ʙᴏᴏᴍ, ᴛʜᴇ sᴀʟᴇs ᴀs ᴡᴇʟʟ ᴀs ᴘʀᴏᴅᴜᴄᴛɪᴏɴ ᴀʀᴇ ʟɪᴋᴇʟʏ ᴛᴏ ʙᴇ ʟᴀʀɢᴇʀ ᴀɴᴅ, ᴛʜᴇʀᴇғᴏʀᴇ, ʟᴀʀɢᴇʀ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ɪs ʀᴇϙᴜɪʀᴇᴅ. As ᴀɢᴀɪɴsᴛ ᴛʜɪs, ᴛʜᴇ ʀᴇϙᴜɪʀᴇᴍᴇɴᴛ ғᴏʀ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ᴡɪʟʟ ʙᴇ ʟᴏᴡᴇʀ ᴅᴜʀɪɴɢ ᴛʜᴇ ᴘᴇʀɪᴏᴅ ᴏғ ᴅᴇᴘʀᴇssɪᴏɴ, sɪɴᴄᴇ ᴛʜᴇ sᴀʟᴇs ᴀs ᴡᴇʟʟ ᴀs ᴘʀᴏᴅᴜᴄᴛɪᴏɴ ᴡɪʟʟ ʙᴇ ʟᴇss. Sᴇᴀsᴏɴᴀʟ Fᴀᴄᴛᴏʀs

Bᴜsɪɴᴇss CʏᴄʟᴇDɪғғᴇʀᴇɴᴛ ᴘʜᴀsᴇs ᴏғ ʙᴜsɪɴᴇss ᴄʏᴄʟᴇs ᴀғғᴇᴄᴛ ᴛʜᴇ ʀᴇϙᴜɪʀᴇᴍᴇɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ʙʏ ᴀ ғɪʀᴍ. Iɴ ᴄᴀsᴇ ᴏғ ᴀ ʙᴏᴏᴍ, ᴛʜᴇ sᴀʟᴇs ᴀs ᴡᴇʟʟ ᴀs ᴘʀᴏᴅᴜᴄᴛɪᴏɴ ᴀʀᴇ ʟɪᴋᴇʟʏ ᴛᴏ ʙᴇ ʟᴀʀɢᴇʀ ᴀɴᴅ, ᴛʜᴇʀᴇғᴏʀᴇ, ʟᴀʀɢᴇʀ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ɪs ʀᴇϙᴜɪʀᴇᴅ. As ᴀɢᴀɪɴsᴛ ᴛʜɪs, ᴛʜᴇ ʀᴇϙᴜɪʀᴇᴍᴇɴᴛ ғᴏʀ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ᴡɪʟʟ ʙᴇ ʟᴏᴡᴇʀ ᴅᴜʀɪɴɢ ᴛʜᴇ ᴘᴇʀɪᴏᴅ ᴏғ ᴅᴇᴘʀᴇssɪᴏɴ, sɪɴᴄᴇ ᴛʜᴇ sᴀʟᴇs ᴀs ᴡᴇʟʟ ᴀs ᴘʀᴏᴅᴜᴄᴛɪᴏɴ ᴡɪʟʟ ʙᴇ ʟᴇss. Sᴇᴀsᴏɴᴀʟ FᴀᴄᴛᴏʀsSᴏᴍᴇ ᴏғ ᴛʜᴇ ʙᴜsɪɴᴇssᴇs ʜᴀᴠᴇ sᴇᴀsᴏɴᴀʟ ᴏᴘᴇʀᴀᴛɪᴏɴs. Dᴜʀɪɴɢ ᴘᴇᴀᴋ sᴇᴀsᴏɴ, ʟᴀʀɢᴇʀ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ɪs ʀᴇϙᴜɪʀᴇᴅ ʙᴇᴄᴀᴜsᴇ ᴏғ ʜɪɢʜᴇʀ ʟᴇᴠᴇʟ ᴏғ ᴀᴄᴛɪᴠɪᴛʏ.

Bᴜsɪɴᴇss CʏᴄʟᴇDɪғғᴇʀᴇɴᴛ ᴘʜᴀsᴇs ᴏғ ʙᴜsɪɴᴇss ᴄʏᴄʟᴇs ᴀғғᴇᴄᴛ ᴛʜᴇ ʀᴇϙᴜɪʀᴇᴍᴇɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ʙʏ ᴀ ғɪʀᴍ. Iɴ ᴄᴀsᴇ ᴏғ ᴀ ʙᴏᴏᴍ, ᴛʜᴇ sᴀʟᴇs ᴀs ᴡᴇʟʟ ᴀs ᴘʀᴏᴅᴜᴄᴛɪᴏɴ ᴀʀᴇ ʟɪᴋᴇʟʏ ᴛᴏ ʙᴇ ʟᴀʀɢᴇʀ ᴀɴᴅ, ᴛʜᴇʀᴇғᴏʀᴇ, ʟᴀʀɢᴇʀ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ɪs ʀᴇϙᴜɪʀᴇᴅ. As ᴀɢᴀɪɴsᴛ ᴛʜɪs, ᴛʜᴇ ʀᴇϙᴜɪʀᴇᴍᴇɴᴛ ғᴏʀ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ᴡɪʟʟ ʙᴇ ʟᴏᴡᴇʀ ᴅᴜʀɪɴɢ ᴛʜᴇ ᴘᴇʀɪᴏᴅ ᴏғ ᴅᴇᴘʀᴇssɪᴏɴ, sɪɴᴄᴇ ᴛʜᴇ sᴀʟᴇs ᴀs ᴡᴇʟʟ ᴀs ᴘʀᴏᴅᴜᴄᴛɪᴏɴ ᴡɪʟʟ ʙᴇ ʟᴇss. Sᴇᴀsᴏɴᴀʟ FᴀᴄᴛᴏʀsSᴏᴍᴇ ᴏғ ᴛʜᴇ ʙᴜsɪɴᴇssᴇs ʜᴀᴠᴇ sᴇᴀsᴏɴᴀʟ ᴏᴘᴇʀᴀᴛɪᴏɴs. Dᴜʀɪɴɢ ᴘᴇᴀᴋ sᴇᴀsᴏɴ, ʟᴀʀɢᴇʀ ᴀᴍᴏᴜɴᴛ ᴏғ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ɪs ʀᴇϙᴜɪʀᴇᴅ ʙᴇᴄᴀᴜsᴇ ᴏғ ʜɪɢʜᴇʀ ʟᴇᴠᴇʟ ᴏғ ᴀᴄᴛɪᴠɪᴛʏ.As ᴀɢᴀɪɴsᴛ ᴛʜɪs, ᴛʜᴇ ʟᴇᴠᴇʟ ᴏғ ᴀᴄᴛɪᴠɪᴛʏ ᴀs ᴡᴇʟʟ ᴀs ᴛʜᴇ ʀᴇϙᴜɪʀᴇᴍᴇɴᴛ ғᴏʀ ᴡᴏʀᴋɪɴɢ ᴄᴀᴘɪᴛᴀʟ ᴡɪʟʟ ʙᴇ ʟᴏᴡᴇʀ ᴅᴜʀɪɴɢ ᴛʜᴇ ʟᴇᴀɴ sᴇᴀsᴏɴ.

Pʀᴏᴅᴜᴄᴛɪᴏɴ ᴄʏᴄʟᴇ ɪs ᴛʜᴇ ᴛɪᴍᴇ sᴘᴀɴ ʙᴇᴛᴡᴇᴇɴ ᴛʜᴇ ʀᴇᴄᴇɪᴘᴛ ᴏғ ʀᴀᴡ ᴍᴀᴛᴇʀɪᴀʟ ᴀɴᴅ ᴛʜᴇɪʀ ᴄᴏɴᴠᴇʀsɪᴏɴ ɪɴᴛᴏ ғɪɴɪsʜᴇᴅ ɢᴏᴏᴅs.

Pʀᴏᴅᴜᴄᴛɪᴏɴ ᴄʏᴄʟᴇ ɪs ᴛʜᴇ ᴛɪᴍᴇ sᴘᴀɴ ʙᴇᴛᴡᴇᴇɴ ᴛʜᴇ ʀᴇᴄᴇɪᴘᴛ ᴏғ ʀᴀᴡ ᴍᴀᴛᴇʀɪᴀʟ ᴀɴᴅ ᴛʜᴇɪʀ ᴄᴏɴᴠᴇʀsɪᴏɴ ɪɴᴛᴏ ғɪɴɪsʜᴇᴅ ɢᴏᴏᴅs. Sᴏᴍᴇ ʙᴜsɪɴᴇssᴇs ʜᴀᴠᴇ ᴀ ʟᴏɴɢᴇʀ ᴘʀᴏᴅᴜᴄᴛɪᴏɴ ᴄʏᴄʟᴇ ᴡʜɪʟᴇ sᴏᴍᴇ ʜᴀᴠᴇ ᴀ sʜᴏʀᴛᴇʀ ᴏɴᴇ. Dᴜʀᴀᴛɪᴏɴ ᴀɴᴅ ᴛʜᴇ ʟᴇɴɢᴛʜ ᴏғ ᴘʀᴏᴅᴜᴄᴛɪᴏɴ ᴄʏᴄʟᴇ ᴀғғᴇᴄᴛ ᴛʜᴇ ᴀᴍᴏᴜɴᴛ ᴏғ ғᴜɴᴅs ʀᴇϙᴜɪʀᴇᴅ ғᴏʀ ʀᴀᴡ ᴍᴀᴛᴇʀɪᴀʟs ᴀɴᴅ ᴇxᴘᴇɴsᴇs.

Answer 2

Hello !

Factors affecting working capital requirement:

• Length of Operating Cycle

• Nature of Business

• Scale of Operation

• Business Cycle Fluctuation

Hope It Helps u :)