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Tuesday, 11 February 2020

Factors which help in determining the working capital requirements of a company are

 


  • Nature of Business influences the working capital required. Eg: A trading firm requires a smaller working capital as compared to a manufacturing firm
  • (ii)  An organisation operating on a higher the scale of operation requires a large amount of working capital as compared to the organization which operates on a lower scale.
  • Different phases of the business cycle affect the requirement of working capital by a firm. In case of the boom, larger amount of working capital is required as compared to depression.
  • (iv) Seasonal factors affect the level of activity and working capital requirement of business. In peak season, larger amount of working capital is required as compared to lean season.
  • (v)  The duration and the length of the production cycle affect the amount of funds required for material and expenses and consequently affect the working capital requirement of a firm. Firms with longer processing cycles  lead to higher working capital requirement of a business.
  • (vi) Credit Allowed affects the amount of debtors and consequently the working capital requirement of a firm.
  • (vii) To the extent the firm avails credit on purchases, the working capital requirement is reduced.
  • (viii) Operating Efficiency of a firm may reduce the level of raw materials, finished goods and debtors resulting in lower requirement of working capital.
  • (ix) Difficulty in availability of raw material and larger lead time will make the firm store a larger quantity of material and larger shall be the amount of working capital required.
  • (or any other correct factor)

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