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Factors Affecting Working Capital

The amount of working capital required by an enterprise depends upon the following factors:

(i)    Nature of Business. The business units which do not keep very high stock of finished goods ad which sell goods on cash basis can manage with less working capital. Service enterprises like transportation are the examples in this regard. but trading and manufacturing concerns which are rewired to keep huge stocks have to arrange for higher amount of working capital.

(ii)    Size of Business. Generally, the size of the concern has a direct relation with the working capital requirements. Big enterprises have to keep higher working capital for investment current assets and for patting current liabilities.

(iii)    Length of Manufacturing Cycle. In certain industries, it takes a long time to convert the raw materials into finished product. There are certain products whose cost mainly consists of cost of law material. For instance, in sugar industry. sugarcane forms more than 70 per cent of the cost of sugar. In such a case, the working capital requirements will be larger.

(iv)    Seasonal Nature of Production. Industries which are engaged n producing and selling seasonal goods such as woolen garments require large amount of working capital during off-seasons than those industries which carry on regular production and sales.

(v)    Turnover of Working Capital. Turnover means the speed with which the working capital is converted into cash by the sale of goods. If the turnover is speedier, the amount of working capital required will be smaller as compared to other concerns.

(vi)    Terms of Buying. Terms of purchase and sale also influence the needs for working capital. If a company purchases raw materials and other services on credit basis and sells goods on cash basis, it will require less working capital. But if a concern purchases raw materials on cash basis but sells the finished goods on credit basis, its requirement of working capital will be higher.

(vii)    Competition and Credit Policy. If the firm is facing server competition, it might follow liberal credit policy to attract and retain the customers. In other words, the firm allows greater time to debtors to pay up. This would mean blocking up of working capital in debt receivables. In other words, the requirements of funds for working capital would be higher than where the firm does not extend liberal credit.

(viii)    Price Level Changes. Working capital requirements are also determined by price level changes. For example, during inflationary period, prices of rawmaterials rise and wage also rise. These would result in an increase in the working capital requirements unless the firm is able to sell its output at increases rates.

(ix)    Operating Expenses. Requirement of cash for meeting the operating expenses like salaries, rents, taxes, transport charges, etc. and meeting the obligations of the creditors favors a larger amount of working capital.

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