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Factors Determining Working Capital

❶The time taken by a supplier of raw materials, goods etc. Credit Policy determines working capital requirement 5.

Turnover of working capital 8. Terms of Credit 9. Requirements of Cash and The requirements of working capital are not uniform in all enterprises, and therefore, factors responsible for a particular size of working capital in one company are different than in other enterprise.

Therefore, a set pattern of factors determining the optimum size of working capital is difficult to suggest. It is an important factor for determining the amount of working capital needed by various companies.

The trading or manufacturing concerns will require more amount of working capital along-with their fixed investment of stock, raw materials and finished products. Public utilities and railway companies with huge fixed investment usually have the lowest needs for current assets, partly because of cash, nature of their business and partly due to their selling a service instead of a commodity.

The average length of the period of manufacture, i. If it takes less time to make the finished product, the working capital required will be less. To give an example, a baker requires one night time to bake his daily quota of bread. Between these two cases may fall other business concerns with varying periods of manufacture requiring different amounts of working capital. Generally, the size of the company has a direct relation with the working capital needs.

Big concerns have to keep higher working capital for investment in current assets and for paying current liabilities. Where the cost of raw materials to be used in manufacturing of a product is very large in proportion to the total cost and its final value, working capital required will also be more. That is why, in a cotton textile mill or in a sugar mill, huge funds are required for this purpose.

A building contractor also needs huge working capital for this reason. If the importance of materials is less, as for example in an oxygen company, the needs of working capital will be naturally not more.

In labour intensive industries, larger working capital will be required than in the highly mechanized ones. The latter will have a large proportion of fixed capital. It may be remembered, however, that to some extent the decision to use manual labour or machinery lies with the management. Therefore, it is possible in most cases to reduce the requirements of working capital and increase investments in fixed assets and vice versa.

The manufacturing concerns generally have to carry stocks of raw materials and other stores and also finished goods. The larger the stocks whether of raw materials or finished goods more will be the needs of working capital. In certain lines of business, e.

Similarly, in public utilities, which must have adequate supplies of coal to assure regular service, stock piling of coal is necessary. In seasonal industries finished goods stocks have to be stored during off seasons.

All these require large working capital. The period of credit allowed and received also determines the working capital requirements of the company. Seasonal changes in the economy also affect the quantum of working capital. Huge amount of working capital is required during the periods of inflation and depression and the requirement declines during the other periods of economic cycle.

Certain industries purchase raw material at huge level due to their irregular supply throughout the year. It is specifically applicable to the manufacturing organisation which requires an unusual type of raw material that can be purchased only with limited sources. According to the new provisions of the SEBI, all the companies are compulsorily to declare the dividend to the shareholders. So the dividend policy has a dominant influence on the working capital position of the organisation.

As per the new provisions, need for the working capital is met with retained earnings. Once dividend is declared and the same has to be paid in cash requires large amounts from the pool of working capital. Need for the working capital depends upon the amount of cash required by the company for its various purposes.

If greater the requirements of cash, the higher will be the working capital needs of the company and vice versa. Apart from the above points, some other factors also affect the working capital requirements.

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Factors Determining Working Capital Requirement Working capital requirement is influenced by various factors. In fact, any and every activity of a company affects the working capital requirements of the company.

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Factors determining working capital requirements. The quantum of working capital is depending upon a large number of factors. It is very difficult to pin point the factor which is highly responsible. The degree of influence of each factor varies from time to time.

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Production policy of the organisation is also an important factor for determining working capital. In case of labour intensive industry the quantum of working capital is required only in smaller amount. Factors Determining Working Capital Requirement Table of Contents [hide] * 1 Factors Influencing Working Capital Management Nature of the Industry / Business Seasonality of Industry and Production Policy .

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factors determining working capital requirement The working capital needs of a firm are determined and influenced by various factors. A wide variety of considerations may affect the quantum of working capital required . What are factors determining working capital requirements in business? Ans: The factors determining working capital needs of a business firm are as follows: 1. Size of the firm: A large firm needs more working capital than a small firm.