Question

Which of the following is not a factor that affects the composition of the working capital?

 A) Nature of business

 B) Nature of raw materials used

 C) Tax structure of the company

 D) Process technology used

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Answer 1

Nature of Business

The basic nature of a business influences the amount of working capital. A trading organisation and a service industry firm usually needs a smaller amount of working capital as compared to a manufacturing organisation. -

Scale of Operations

Organisations which operate on a large scale, their quantum of inventory and debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.

Business Cycle

Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be larger and, therefore, larger amount of working capital is required. As against this, the requirement for working capital will be lower during the period of depression, since the sales as well as production will be less.

Seasonal Factors

Some of the businesses have seasonal operations. During peak season, larger amount of working capital is required because of higher level of activity.

As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.

Production Cycle/Operating Cycle

Production cycle is the time span between the receipt of raw material and their conversion into finished goods. 4

Some businesses have a longer production cycle while some have a shorter one. Duration and the length of production cycle affect the amount of funds required for raw materials and expenses.

Credit Allowed '

Different firms allow different credit terms to their customers. These depend upon the level of competition that a firm faces, as well as the credit worthiness of their clientele.

A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital.

Explanation:

process technology used

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Answer 2

We need to answer which of the  factors given do not affect the composition of the working capital

• Let us analyze the options given in the question one by one
• 'Nature of business ' affects the composition of the working capital as when the business is a shop the working capital will be different depending on the shop
• For example. a tailoring shop will require less working capital and more investment.
• 'Nature of raw materials used ' also plays a huge role in the composition of working capital
• For example, as we all know the cotton rates required for one organization will be different from the iron rates required by another.
• ' Process technology used' also plays a huge role in the composition of working capital
• Some capital based industries will require more capital when compared to labor-based companies
• "Tax structure of the company " is the only factor that will not affect the composition of the working capital
• As to whether the working capital is big or small, only the tax will have to be paid on the profit earned by the company.