Factors Affecting Working Capital Requirements

Factors Affecting Working Capital Requirements

               There are many factors determining the working capital requirements of the business. The most important and common factors that are influencing upon working capital requirements of business are

§  Nature of Business

§  Size of Business

§  Growth and Expansion of Business

§  Length of manufacturing process

§  Production Policy

§  Operating Efficiency

§  Credit Policy

§  Profit Level

Now let us discuss and understand these factors one by one below

§   Nature of Business: 

                Working Capital requirements of business are basically influenced by nature of business that is being carried out. The working capital requirements vary from industry to industry. For instance companies in transportation industries need less working capital when compared to companies in manufacturing industries.

§     Size of Business:

                 The firms which are operating at very large scale need huge working capital for their operations when compared to small businesses. It is because of huge inventories and receivables required in large businesses.

§     Growth and Expansion: 

                  If the business is growing and expanding its operations then the working capital required will be more when compared to those that are not expanding or growing or already have being well established.

§     Manufacturing Cycle and Process: 

                 Manufacturing cycle refers to the time span between purchase of raw material and conversion of those raw materials into finished goods. A manufacturing firm which has longer process and takes much more time to complete the raw material into finished goods needs more working capital as the process is lengthy. Longer the manufacturing process large the working capital requirements or vice versa.

§      Production Policy: 

              The production policy of a firm has its effect on the working capital required. As a manufacturing firm which uses machineries for manufacturing requires less working capital as when compared to a firm which uses more manpower for manufacturing goods. Production policy affecting the requirements can largely be seen in the seasonal demand product industries as during off season working capital requirements vary when compared to peak time.

§      Operating Efficiency:

                  Firms whose operations are efficient use all the resources and needs less working capital when compared to a firm that has less operating efficiency. Management can ensure the efficiency by minimizing the wastage, improving coordination’s and accelerating cash cycle.

§     Credit Policy towards Customers:

                A firm which provides liberal or long credit facility to its customers needs more working capital then those which provide less credit period facility to its customers. Another scenario is that when a company provides credit to its customer without knowing the creditworthiness of the firm and if the customer fails to repay it, it becomes liability to the company.

§    Credit Policy of Suppliers: 

                 A firm requirements for credit policy also varies when the suppliers of the company has liberal credit policy the firm needs less working capital or vice versa in case if suppliers has shorter credit policy or cash payment policy.

§      Changes in the Prices: 

                   The change in the prices of the raw materials affects the requirements of working capital directly as the price rises the amount payable to supplier also increases as a result as a result the firm needs more working capital or versa vice in reverse case when price falls.