Q.Steelone Enterprises is manufacturing high quality steel utensils. The demand for steel utensils is rising as people are getting aware that plastic is not good for health. This has led to increase in production of steel utensils. To encourage sales, Steelone Enterprises declared a liberal credit policy which allows three months credit to its wholesale buyers. In the light of the above, identify the two factors affecting working capital requirements of Steelone Enterprises. State with reason, whether the factors as identified above, will result in high or low working capital requirement.
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Start your 14-day free trial to unlock the full solution →The two factors affecting Steelone's working capital are scale of operations (rising production increases WC) and credit policy (three-month credit to buyers increases WC). Both push the requirement higher.
Working capital is the lifeblood of day-to-day operations—the funds a business needs to bridge the gap between paying suppliers and receiving cash from customers. For Steelone Enterprises, two distinct forces are reshaping how much working capital it must keep on hand, and both stem directly from the strategic choices and market realities the firm faces.
The first factor is scale of operations. Steelone is ramping up production to meet surging demand for steel utensils as health-conscious consumers turn away from plastic. A larger scale of operations means the company must hold more raw materials in inventory, carry greater volumes of work-in-progress on the factory floor, and maintain bigger stocks of finished goods ready for dispatch. Each rupee of additional output ties up cash in the production cycle. The machinery runs longer, workers clock more hours, and suppliers deliver larger consignments—all of which must be paid for before a single utensil reaches a customer's kitchen.
Effect on working capital: This factor results in a high working capital requirement. More production directly translates to more money locked in inventory and operating expenses, stretching the cash conversion cycle and demanding a deeper pool of liquid funds.
The second factor is credit policy. Steelone has adopted a liberal stance, extending three months of credit to wholesale buyers. This is a deliberate trade-off: easier payment terms attract more orders and build loyalty, but they also mean the company must wait a full quarter to collect cash after goods leave the warehouse. During those ninety days, Steelone has already paid its suppliers, its workers, and its utility bills—yet its own receivables remain outstanding. The firm is, in effect, financing its customers' operations. …
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