Q.Discuss the factors determining working capital requirement.

The amount of working capital a company needs depends on factors such as the nature and size of the business, the production cycle, sales volume, business cycle conditions, and its credit and inventory policies.

Working capital is the capital required to meet day-to-day operating expenses like the purchase of raw materials, payment of wages and overheads, and holding stock and receivables. The requirement of working capital differs from company to company because of the following factors.

1. Nature of business — Trading and service concerns need less working capital, while manufacturing companies need more because of the time gap between purchase of materials and sale of finished goods.
2. Size of business — A large-scale business requires more working capital than a small one due to larger stocks, receivables and expenses.
3. Volume of sales — Higher sales volume calls for larger stock of goods and more receivables, thus more working capital.
4. Length of production cycle — The longer the manufacturing or production process, the more funds are locked up in work-in-progress, increasing working capital needs.
5. Business cycle conditions — During a boom, more working capital is needed to meet higher demand; during a depression, requirements fall.
6. Credit policy — If the company sells largely on credit and gives long credit periods, more working capital is tied up in debtors. …