Factors influencing working capital

The working capital requirement is constant for the companies which are selling goods throughout the season whereas the companies which are selling seasonal goods require huge amount during season as more demand, more stock has to be maintained and fast supply is needed whereas during off season or slack season demand is very low so less working capital is needed.

Another factor related to credit policy is how much and for how long period company is getting credit from its suppliers. The degree of Factors influencing working capital prevailing in the market-place has an important bearing on working capital needs.

Internal and External Factors That Affect Working Capital

In the case of manufacturing business it takes a lot of time in converting raw material into finished goods. A firm manufacturing refrigerators will have maximum sales during summer seasons and minimum sales during winter seasons thus affecting its working capital.

Factors influencing Working capital Management

Terms of Purchase and Sales The working capital requirements of a company depends on its terms of purchase and sales: If the credit period is short, there is a need of more amount of working capital and vice versa.

Factors influencing working capital Many companies might think twice about borrowing or even if they do borrow, the cost of paying back the loan hits their bottom line.

Some companies may not be affected by rising prices while others may be badly hit by it.

Factors Determining Working Capital Requirement

In case of public utilities, less capital is required. If raw material and other inputs are easily available on credit, less working capital is needed. The level of Taxes: Manufacturing Process determines working capital requirement The manufacturing process may be two, three or four.

So, in this time, the company has to spend a lot of money on raw material, wages, etc. Depending on the tax environment of the industry, working capital needs are also affected. Some such examples are: This means that the firm maintains a huge balance of cash and marketable securities carries large amount of inventories, and gas generous terms of credit to customers which leads to a high level of debtors.

The longer this period, the more will be the time for which the capital remains blocked in raw material and semi-manufactured products.

Production cycle means the time involved in converting raw material into finished product. Now read related article on this topic: However, the following are considered some of the important factors that generally influence requirement for working capital.

Then taking a short term loan for improving the working capital situation would be more viable. Hence, these companies require less amount of working capital than others. Other Factors Additional factors influencing working capital requirements: Rate of Stock Turnover determines working capital requirement Rate of stock turnover refers to the speed at which the raw materials, work in progress and finished goods converted into cash form.

A business has to constantly plan ahead for the future to make sure that at no point does its capital situation become adverse.

Working Capital – Definition and Factors Affecting Working Capital

The manufacturing cycle comprises of the purchase and use of raw-materials and the production of finished goods. Length of Operating Cycle: An increase in production from time to time will tend to increase the need of working capital.

So, higher the competition, higher would be the requirement of working capital. Time and Complexities of Manufacturing Process The time and complexities involved in the manufacturing process affect the amount of working capital that is required: If raw materials are easily available and there is ready supply of raw materials and inputs then firms can manage with less amount of working capital also as they need not maintain any stock of raw materials or they can manage with very less stock.

But, during the recession period, the sales decline as people tend to buy less. The amount of working capital requirements of a firm varies with every movement of the business cycle.

Growth means Factors influencing working capital development of the scale of business operations production, sales, etc. New Technologies and New Products: So the management has no discretion in this respect.

If the enterprise makes use of such raw material which is available easily throughout the year, then less working capital will be required, because there will be no need to stock it in large quantity.

Such a production will help firms utiliseits resources to its fullest extent. If operating cycle is long then more working capital is required whereas for companies having short operating cycle, the working capital requirement is less.

If the market is strong and competition is weak, a firm can manage with smaller inventory of finished goods, because customers can be supplied with some delay. The sale of ceiling fans reaches a peak during the summer months and drops sharply during the winter period.

If the manufacturing process is short and simple, then less working capital is required. If a company is using labour intensive technique of production then more working capital is required because company needs to maintain enough cash flow for making payments to labour whereas if company is using machine-intensive technique of production then less working capital is required because investment in machinery is fixed capital requirement and there will be less operative expenses.

The factors discussed above influence the quantum of working capital in the business. The assessment of working capital requirement is made keeping these factors in view.

Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above.

Factors Affecting the Working Capital: The firm must estimate its working capital very accurately because excessive working capital results in unnecessary accumulation of inventory and wastage of capital whereas shortage of working capital affects the smooth flow of operating cycle and business fails to meet its commitment.

Factors Affecting the Working Capital: The firm must estimate its working capital very accurately because excessive working capital results in unnecessary accumulation of inventory and wastage of capital whereas shortage of working capital affects the smooth flow of operating cycle and business fails to meet its commitment.

Factors determining working capital requirements.

Top 13 Factors affecting the Working Capital of a Company

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. The working capital cycle of a company is influenced by a number of factors. The nature of the business itself is a major aspect as in a service industry, there is no inventory to be maintained but in case of a manufacturing business- like garment industry, one has to maintain the inventory.

Factors Influencing Working Capital Management Nature of the Industry / Business.

Working Capital – Definition and Factors Affecting Working Capital

The management of working capital is completely different from industry to industry. A simple comparison of the service industry and manufacturing industry can clarify the point.

Factors influencing working capital
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