Which Factors are affecting the Working Capital Requirements?

Which Factors are affecting the Working Capital Requirements?

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.