Factors Influencing Working Capital Essay

The work gravid needs of a planetary house are determined and influenced by various factors. A massive variety of considerations may affect the quantum of work capital required and these considerations may vary from while to time. The works capital needed at one point of time may not be unsloped enough for some other situation. The determination of workingss capital need is a continuous knead and must be under siren on a regular basis in the light of the changing situations. by-line are some of the factors which are relevant in determining the working capital needs of the firm1. Basic Nature of Business The working capital emergency is closely related to the nature of the furrow of the firm. In case of a retail shop or a trading firm, the amount of working capital required is small enough. Most of the transactions are undertaken in cash and the length of the direct cycle is generally small. The trading concerns usually have smaller needs of working capital, however, i n certain(p) cases, large inventories of goods may be required and consequently the working capital may be large. In case of financial concerns (engaged in financial business) at that place may not be stock of goods nevertheless these firms do have to affirm sufficient liquidity all the times.In case of manufacturing concerns, different types of proceeds processes are performed. One unit of raw material introduced in the production schedule may take a long occlusion before it is available as finished goods for sale. Funds are jam not only in raw materials but also in labor expenses and overheads at every stage of production. The operating cycle is usually a longer one and sales are do generally on point of reference cost. So, in case of manufacturing concerns, there is a requirement of substantial working capital.2. Business Cycle Fluctuations Different phases of business cycle i.e., boom, recession, recovery etc. also affect the working capital requirement. In case of boom conditions, inflationary pressure appears and business activities expand. As a result, the boilersuit need for cash, inventories etc. increases resulting in more and more funds blocked in these current assets. In case of recession period however, there is usually a dullness in business activities and there allow foring be an opposite effect on the direct of working capital requirement. There will be a fall in inventories and cash requirement etc.3. Seasonal Operations If a firm is operating in goods and services having seasonal fluctuations in demand, then the working capital requirement will also fluctuate with every change. In a cold drink factory, the demand will certainly be higher during summer season and therefore, more working capital is required to maintain higher production, in the form of larger inventories and bigger receivables. On the other hand, if the operations are unagitated and even through out the year then the working capital requirement will be constant and will not be affected by the seasonal factors.4. Market Competitiveness The market place competitiveness has an important bearing on the working capital needs of a firm. In passel of the competitive conditions prevailing in the market, the firm may have to offer liberal faith wrong to the customers resulting in higher debtors. Even larger inventories may be maintained to serve an order as and when received otherwise the customer may go to some other supplier. Thus, the working capital tends to be high as a result of greater investment in inventories and receivable. On the other hand, a monopolistic firm may not require larger working capital. It may ask the customers to stick out in advance or to wait for some time after placing the order.5. Credit Policy The credit polity means the totality of terms and conditions on which goods are sold and purchased. A firm has to move with two types of credit policies at a time. One, the credit policy of the supplier of raw materials, goo ds etc., and two, the credit policy relating to credit which it extends to its customers. In both the cases, however, the firm while deciding its credit policy, has to take care of the credit policy of the market. For example, a firm might be purchasing goods and services on credit terms but selling goods only for cash. The working capital requirement of this firm will be tear down than that of a firm which is purchasing cash but has to sell on credit basis.6. Supply Conditions The time taken by a supplier of raw materials, goods etc. after placing an order, also determines the working capital requirement. If goods are received as soon as or in a short period after placing an order, then the purchaser will not like to maintain a high level of inventory of that good. Otherwise, larger inventories should be kept e.g., in case of imported goods. It is often seen that the shopkeepers may not be keeping stock of all items, but whenever there is a demand, they procure from the wholesaler / manufacturer and supply it to their customers.Thus, the working capital requirement of a firm is determined by a phalanx of factors. Every consideration is to be weighted relatively to determine the working capital requirement. Further, the determination of working capital requirement is not once a while exercise, rather a continuous limited review must be made in order to assess the working capital requirement in the changing situation. There are various reasons which may require the review of the working capital requirement e.g., change in credit policy, change in sales volume etc.