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Important factors determining Working Capital requirements

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❶Consequently, such enterprises need little working capital.

Factors Determining Working Capital

Thursday, 23 June 2011
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In this case, the amount of working capital required is large. Firms may differ in their capacity to generate profit from the business. Other firms may earn low profits. The net profit is a source of working capital to the extent that it has been earned in cash. A high net profit margin contributes towards the working capital pool.

The level of Taxes: The net profit is calculated after deduction of tax. So the management has no discretion in this respect. Therefore, the tax is an important aspect of working capital planning.

If tax liability increases, it leads to an increase in the requirement of working capital and vice versa. Dividend has a bearing on working capital since it is appropriation profits. In other words, declaration of dividends leads to more working capital requirement and vice versa. It also exerts an influence on the quantum of working capital required. The effect of depreciation policy on working capital is indirect. Increasing prices necessitate the use of more funds for managing an existing level of activity.

The efficiency of operations accelerates the pace of cash cycle and involves the working capital turnover. The need for working capital in a firm will be less if it avails liberal credit facilities. For example, the working capital requirements of an edible oil mill or a building construction company will be more that those of an iron and steel mill. The working capital requirements of trading and financial enterprises are the maximum as they have to maintain a sufficiently large amount of cash, inventories and receivables.

Larger the size of business, the greater will be the working capital requirements of the firm as more funds will be looked up in inventories and receivables to meet the demands of bigger size of business.

Manufacturing cycle refers to the time-span between the purchase of raw- materials and their conversion into finished goods by means of manufacturing process.

Funds remain tied up in semi-finished goods during the manufacturing process. Longer the manufacturing cycle the larger the working capital needed and vice versa.

For example, a distillery requires heavy investment in inventories because it has an ageing process. On the other hand, in a bakery, raw materials are soon.

In certain industries, there are wide seasonal changes in demand for the product manufactured by the firm. In such a case, if the firm adopts a steady production policy, inventories of finished goods will accumulate during the off-season periods requiring a higher amount of working capital. If the firm opts to vary its production schedules in accordance with changing demand, there may be serious production problems.

During the slack season, the firm will have to maintain its working force and fixed assets without adequate production and sale. During the peak period, it will have to operate at full capacity.

This arrangement may be a costly affair. One namely is to manufacture some other product during the off-season and concentrate on the main line during the season of the main product. But it may not be feasible in all the cases. There are business cycles resulting in marked variations in business conditions. There is an upward swing of business conditions leading to a boom when the business activities are at their peak.

It is followed by a downward phase called recession when business activities decline. The downward phase ends in a depression, completing the business cycle.

Then again, there is a recovery to start a new business cycle. During the recovery, the working capital requirements increase while during the stock period, the working capital requirements decrease. In an industry where raw material is available only in a particular season and the firm has to buy raw material in bulk in that reason to enoure uninterrupted production of finished goods, the working capital requirements will be more.

When in cases where the supply of raw material is unpredictable, the firm may have to accumulate stock of raw material requiring more working capital. The terms of credit granted to customers normally depend upon the norms followed in the industry in which the firm is engages. But the firm has some flexibility within the norms. Ideally, the firm should be use discretion in granting credit to its customers.


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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 .

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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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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 and these considerations may vary from time to time. The working capital needed at one point of . 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.

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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 Competition Production Cycle Ti. Determinants of Working Capital: (or) Factors Determining Working Capital; Determinants of Working Capital: (or) Factors Determining Working Capital: Nature of Business; For determining the working capital of an organization, production policies are much important. If the organization is labor-intensive, then it requires minimal working.