Factors Influencing Working Capital Essay

The works with child(p) needs of a firm argon determined and influenced by various factors. A wide variety of considerations may affect the quantum of workings capital involve and these considerations may vary from magazine to clock time. The working capital needed at one point of time may not be good enough for some different situation. The determination of working capital unavoidableness is a ceaseless exercise and must be undertaken on a regular basis in the light of the changing situations. Following are some of the factors which are germane(predicate) in determining the working capital needs of the firm1. staple fibre Nature of Business The working capital want is closely link up to the nature of the business of the firm. In case of a retail ca-ca or a trading firm, the amount of working capital conductd is sm only enough. Most of the transactions are undertaken in cash and the space of the operating cycle is generally small. The trading concerns commonly h ave little needs of working capital, however, in certain cases, large inventories of goods may be required and consequently the working capital may be large. In case of financial concerns (engaged in financial business) there may not be stock of goods and these firms do have to maintain fitted liquidity all the times.In case of manufacturing concerns, different types of production processes are performed. One unit of raw material introduced in the production schedule may take a long period before it is functional as finished goods for sale. Funds are blocked not solo in raw materials however also in labor expenses and overheads at every stage of production. The operating cycle is usually a long-term one and sales are made generally on citation ground. So, in case of manufacturing concerns, there is a emergency of substantial working capital.2. Business Cycle Fluctuations Different phases of business cycle i.e., nab, recession, recovery and so forth also affect the workin g capital demand. In case of boom conditions, inflationary pressure appears and business activities expand. As a result, the overall need for cash, inventories etc. increases resulting in more and more funds blocked in these current assets. In case of recession period however, there is usually a dullness in business activities and there leave alone be an opposite effect on the aim of working capital requirement. in that location give be a fall in inventories and cash requirement etc.3. Seasonal Operations If a firm is operating in goods and services having seasonal fluctuations in demand, therefore the working capital requirement will also fluctuate with every change. In a unwarmed drink factory, the demand will certainly be highschool during pass 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 trading 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.4. Market scrap 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 reference work terms to the customers resulting in higher debtors. Even larger inventories may be hold 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 elevate or to wait for some time after placing the order.5. Credit insurance The credit insurance 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., and two, the credit policy relating to credit which it extends to its customers. 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 expertness 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.6. Supply Conditions The time taken by a supplier of raw materials, goods etc. after placing an order, also determines the working capital requirement. If goods are received as soon as or in a short period after placing an order, then the emptor will not like to maintain a high level of inventory of that good. Otherwise, larger inventories should be kept e.g., in case of trade goods. It is often seen that the shopkeepers may not be keeping stock of all items, but whenever th ere is a demand, they procure from the wholesaler/producer and planning it to their customers.Thus, the working capital requirement of a firm is determined by a host of factors. Every consideration is to be weighted relatively to determine the working capital requirement. Further, the determination of working capital requirement is not once a while exercise, rather a continuous review must be made in order to treasure the working capital requirement in the changing situation. There are various reasons which may require the review of the working capital requirement e.g., change in credit policy, change in sales spate etc.