Question

List any three factors affecting the Working Capital requirement of a company.

State any three factors that determine the requirements of working capital of a company.

Answer 1

Factors affecting the working capital requirement of the company:

1. Nature of Business: The working capital demand is heavily influenced by the sort of business. Manufacturing firms, for example, need more working capital since they must keep inventories of finished goods, work-in-progress, and raw materials. However, because they don't deal with physical inventory, service-based businesses like IT companies or experts need comparatively less working capital.
2. Scale of operations: Due to their increased production and sales volume, large-scale operations need additional working capital. On the other hand, little enterprises need less operating capital and engage in fewer activities. 
3. Business cycle: Businesses may require additional working capital during an economic boom in order to meet increased demand for their products and services. On the other hand, demand declines during a recession, and businesses may need less working capital as a result of fewer activities. 
4. Seasonal Factors: In order to manage greater production and sales during the peak season, businesses that deal with seasonal products such as wool clothing or agricultural equipment need more working capital. They demand less working capital in the off-season. 
5. Production cycle: The amount of time needed to transform raw resources into completed goods is known as the manufacturing cycle. The working capital requirement rises as a result of a longer production cycle, which keeps money in work-in-progress inventory for longer. Working capital is less necessary when the production cycle is shorter. 
6. Credit allowed: 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.
7. Credit availed: Working capital is also affected by the conditions of credit that suppliers give. When a business extends credit to its suppliers, it lessens the need for quick cash, which lowers the working capital requirement.
8. Operating efficiency: Businesses with great operating efficiency can optimize inventory levels and minimize waste by better managing their resources. As a result, less working capital is needed. On the other hand, operational inefficiencies raise the need for working capital. 
9. Availability of raw material: The availability of raw materials affects a company's working capital requirements. Having access to reliable raw materials at reasonable costs lowers the need for unnecessary inventories and wasted working capital. If raw materials are scarce, price unstable, or acquired from distant suppliers, it may be necessary to increase inventories and working capital to ensure continuous production and reduce supply chain risks.
10. Growth Prospects: Companies with growth ambitions or expansion plans need more working capital to support increasing production and sales. For example, entering a new market or introducing a new product necessitates substantial additional funding.
11. Level of competitiveness: In highly competitive industries, corporations frequently provide better credit terms or keep larger stocks to assure continuous sales. This increases the working capital requirements.
12. Inflation: Inflation raises the cost of raw materials, labor, and other inputs, resulting in increased working capital requirements. For example, rising raw material prices cause businesses to pay more upfront, raising their working capital requirements.