Question

Explain how the following factor affects the working capital requirement of a business:

Inflation

Answer 1

1. A business's need for working capital rises with inflation.
2. The cost of labor, raw materials, and other operational expenses increases during inflation. Therefore, a company requires more money to pay increased operating costs and to keep the same amount of inventory.
3. In addition, if sales prices rise in together with rising costs, credit sales may be affected and a larger investment in accounts receivable may result.
4. As a result, companies must maintain greater working cash on hand to efficiently handle the rising costs in order to maintain continuous operations.