Factors affecting the working capital requirements

there are many factors that affects the working capital. Here i am providing some most important factors.

Nature of business

The basic nature of the business influences the amount of working capital required trading. Organisation usually needs a small amount compared to a manufacturing organisation. This is because there is usually no processing therefore there is no distinction between raw material and finished goods sales can be effected immediately upon the receipt of material. Sometimes even before that in a manufacturing business, however, raw material needs to be converted into finished goods. Before any sales become possible other factors remaining the same. iterating business required less working capital similarly service industry which usually do not have to maintain inventory require less capital.

working capital

Daily News Analysis
Financial Management
Financial Market
Factor affecting capital budgeting decision

Sales of operations

For organisations which operate on a higher scale of operation the quantum of inventory and debtors required is generally high such organisations, therefore require a large amount of working capital as compared to the organisation 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 bomb. The sales, as well as protection, are likely to be a larger and therefore larger amount of working capital is required as against this the requirement for capital will be lower during the period of depression as the sales as well as protection will be small.

Seasonal factors

Most businesses have some seasonality in their operations in peak seasons because of the higher level of activity a large amount of working capital is required as against. This the level of activity as well as the requirement for working capital will be lowered during the lean season.

Production cycle

Production cycle is the time span between the receipt of raw materials and their conversion into finished goods. Some businesses have a longer production cycle will some have a shorter duration and the length of production cycle affect the amount of fund required for raw materials and expenses consequently working capital requirement is higher in form with long processing cycle and lower inform with shorter processing cycle.

Credit allowed

Different form allow different credit terms to their customers. This depends upon the level of competition that a firm faces as well as the creditworthiness of their client. Library credit policy results in a higher amount of debt or increasing the requirement of working capital.

Credit availed

Just as a firm allows created to its customer. It also may get credit from its supplier to the extent. It avail the credit on purchase the working capital requirement is reduced.

Operating efficiency

From manage their operations with varying degrees of efficiency, For example, if for managing it’s raw materials efficiently may be able to manage with smaller balance. This is reflected in a higher inventory turnover ratio similarly better debtors turnover their ratio may be achieved reducing the amount. Tried up in receivables better sales referred me reduce. The average time for which finished goods inventory is held such efficiencies mein reduce the level of raw materials finished goods and lattice resulting in lower requirement of working capital.

Availability of raw material

If the raw materials and other required materials are available freely and continuously lower stock levels may sufficient. If however raw materials do not have a record of uninterrupted availability higher stock levels may be required in addition the time lag between the placement of the order and the actual receipt of the material is also relevant larger. The lead time larger than the quantity of material to be stored and larger will by the amount of working capital required.

Growth prospects

If the growth potential of a concern is perceived to be higher. It will require a larger amount of working capital, so that it is able to meet higher production and sales target whenever required.

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.