Q.Explain the factors affecting the requirement of Working Capital.

The amount of working capital a company must keep circulating depends on how it operates day to day — what it sells, how fast stock turns over, and on what credit terms it buys and sells.

1. Nature of the business. A trading company that turns over stock quickly needs less working capital than a manufacturing company, which must fund raw material, work-in-progress, and finished stock through a longer operating cycle.

2. Scale of operations. A larger volume of production and sales requires a correspondingly larger investment in stock, debtors, and cash.

3. Length of the operating cycle. The longer the gap between spending cash on raw material and receiving cash from sales, the greater the working capital needed to bridge that gap.

4. Credit policy. A company selling largely on credit needs more working capital than one selling mostly for cash, since funds stay locked in debtors longer.

5. Terms of purchase. A company enjoying longer credit from its own suppliers needs less working capital of its own, since creditors effectively fund part of its short-term needs. …

Discussing only 'credit policy to customers' and omitting the offsetting effect of credit RECEIVED from suppliers, wh …