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Determining Working Capital Requirements

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❶In certain industries, there are wide seasonal changes in demand for the product manufactured by the firm.

Thursday, 23 June 2011

Factors Determining Working Capital
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The operating cycle is usually a longer one and sales are made generally on credit terms. So, in case of manufacturing concerns, there is a requirement of substantial working capital. Different phases of business cycle i. In case of boom conditions, inflationary pressure appears and business activities expand. As a result, the overall need for cash, inventories etc. In case of recession period however, there is usually a dullness in business activities and there will be an opposite effect on the level of working capital requirement.

There will be a fall in inventories and cash requirement etc. 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 smooth and even through out the year then the working capital requirement will be constant and will not be affected by the seasonal factors. The market competitiveness has an important bearing on the working capital needs of a firm.

In view of the competitive conditions prevailing in the market, the firm may have to offer liberal credit terms 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 pay in advance or to wait for some time after placing the order.

The credit policy means the totality of terms and conditions on which goods are sold and purchased. A firm has to interact with two types of credit policies at a time. One, the credit policy of the supplier of raw materials, goods etc. 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 lower than that of a firm which is purchasing cash but has to sell on credit basis.

The time taken by a supplier of raw materials, goods etc. 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. 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 .

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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.