Factors affecting the Working Capital Requirements
Working capital requirement is influenced by various factors. In fact, any and every activity of a company affects the working capital requirements of the company. Some important of them are listed below
Nature of Business: The basic nature of a business influences the amount of working capital required. A trading organization usually needs a lower amount of working capital compared to a manufacturing organization. This is because there is, usually no processing, therefore, there is no distinction between raw materials and finished goods.
Scale of Operations: For organizations which operate on a higher scale of operation, the quantum of inventory, debtors required is generally high. Such organizations, therefore, require large amount of working capital as compared to the organizations which operate on a lower scale.
Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be higher and therefore, higher amount of working capital is required.
Production Cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Some businesses have a longer production cycle while some have a shorter one. Duration and the length of production cycle, affects the amount of funds required for raw materials and expenses.
Operating Efficiency: Firms manage their operations with varied degrees of efficiency. For example, a firm managing its raw materials efficiently may be able to manage with a smaller balance. This is reflected in a higher inventory turnover ratio.
Availability of Raw Material: If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. If, however, raw materials do not have a record of un-interrupted availability, higher stock levels may be required.
Inflation: With rising prices, higher amounts are required even to maintain a constant volume of production and sales. The working capital requirements of a business thus, become higher with higher rate of inflation.