Question

Explain the following factor affecting the working capital requirement of a business: 

Credit allowed

Answer 1

A company's working capital needs are greatly affected by the credit terms negotiated with creditors and the credit provided by suppliers. The immediate cash outflow needed to buy inventory or raw materials is decreased when suppliers provide favorable credit terms, such as kept payment periods or trade credit. As a result, the company is able to save its financial reserves for use in other operating requirements.