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What are the factors that affects working Capital Requirements ?

The working capital needs of an enterprise are influenced by numerous factors. These are :

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(i) Nature of business

(ii) Size of the enterprise

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(iii) Seasonality of operations

(iv) Production policy

(v) Market conditions

(vi) Technology and manufacturing policy

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(vii) Price level changes.

(i) Nature of Business:

The requirement of working capital of an enterprise depends upon the nature of business. A trading concern like a garments show-room, a service concern like an electricity undertaking or a transport corporation have a short operating cycle. Their requirement for working capital is small. A manufacturing concern like cotton textiles or woolen factory will have a long operating cycle specially if they are selling their goods on credit. Hotels and restaurants have minimum requirement of working capital 10 to 20% whereas trading and construction industries have highest working capital requirement 80 to 90%.

(ii) Size of the Enterprise:

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An enterprise working on a high level of activity has a higher level of working capital requirement and vice-versa. An increase in production from time to time will tend to increase the need of working capital.

(iii) Seasonally of Operations:

Those firms which have marked seasonality in their operations have fluctuating working capital requirements. A firm manufacturing refrigerators will have maximum sales during summer seasons and minimum sales during winter seasons thus affecting its working capital. Such firms have a need of higher working capital during summers and lower in winter season.

Firms also experience cyclical fluctuations in the demand of their product and services. During upward swing in the economy, sales will increase and hence, debtors too. Under boom, the firms generally do substantial borrowing to increase their productive capacity. Whereas a decline in the economy results in low level of sales, inventories, debtors etc. Rather, firms try to reduce their short-term borrowings.

(iv) Production Policy:

A firm having the product of seasonal nature may follow a policy of steady production in order to dampen the fluctuations in working capital requirements. A manufacturer of referigerator will not intensify the production activity during the peak business rather he will follow a steady production throughout the year. Such a production will help firms utiliseits resources to its fullest extent. Such a policy will mean accumulation of inventories during off season and their quick disposal during the peak season.

(v) Market Conditions:

When competitive conditions are prevailing in the market, a larger inventory of finished goods in needed as customers mayn’t be inclined to wait. Further, a liberal credit policy may be offered to the customer by the competitors. Both the conditions demand higher level of working capital, more investment in finished goods and debtors as well. A higher collection period will also imply tie-up of larger funds in book debts. Similarly, delayed payments, if not checked in time, may increase the working capital requirements much to the detrimental of the entrepreneur.

(vi) Technology and Manufacturing Policy:

The manufacturing cycle comprises of the purchase and use of raw-materials and the production of finished goods. Longer the manufacturing cycle, larger will be the working capital requirements. The manufacturing cycle of a computer may range in months whereas that of a toothpaste may be a few hours. Thus, if there are alternative technologies of manufacturing a product, the technological process withthe shortest manufacturing cycle should be chosen. Non-manufacturing firms, service enterprises like P & T department, and financial enterprises like .banks don’t have a manufacturing cycle.

(vii) Price Level Changes:

An increase in price level will require a firm to maintain a higher amount of working capital. Some companies may not be affected by rising prices while others may be badly hit by it. Rising prices have different effects for different companies.

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