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What are factors determining working capital requirements in business?

Factors Determining Working Capital

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The larger the stocks whether of raw materials or finished goods more will be the needs of working capital. In certain lines of business, e. Similarly, in public utilities, which must have adequate supplies of coal to assure regular service, stock piling of coal is necessary. In seasonal industries finished goods stocks have to be stored during off seasons. All these require large working capital.

Turnover means the speed with which the working capital is recovered by the sale of goods. In certain businesses, sales are made quickly and the stocks are soon exhausted and new purchases have to be made. In this manner, a small amount of money invested in stocks will result in sales of much larger amount. Considering the volume of sales, the amount of working capital requirements will be rather small in such type of business. There are other businesses where sales are made irregularly.

For example, in case of jewellers, a costly jewellery may remain locked up in the show-window for a long period before it catches the fancy of a rich lady. In such cases, large sums of money have to be kept invested in stocks. But a baker or a news-hawker may be able to dispose of his stocks quickly, and may, therefore, need much smaller amounts by way of working capital. A company purchasing all raw-materials for cash and selling on credit will be requiring more amount of working capital.

Contrary to this, if the enterprise is in a position to buy on credit and sell it for cash, it will need less amount of working capital. The length of the period of credit has a direct bearing on working capital. The essence of this is that the period which elapses between the purchase of materials and sale of finished goods and receipts of sale proceeds, will determine the requirements of working capital.

There are some industries which either produce goods or make sales only seasonally. For example, the sugar industry produces practically all the sugar between December and April and the woollen textile industry makes its sales generally during winter. The working capital requirements of a company depends on the degree of competition in the market. If the competition is intense, then the company has to spend a lot of money on running advertising campaigns and sales promotion.

It will also have to keep more stock and sell on credit. So, it will require more working capital. A service company usually has a short operating cycle or period. It also sells on a cash basis. So, it requires less working capital. For example, electricity and transport companies.

A manufacturing company usually has a long operating cycle. In the case of trading concern, cash is used to buy goods, goods are sold on credit to customers who become sundry debtors, the sundry debtors may accept bill of exchange i. Bills Receivable, conversion of bills receivable into cash.

At this stage, one operating cycle is completed. The following formula may be used to express the frame work of the operating cycle:.

The computations may be made as under. The average inventory, work in progress, trade creditors, book debts and finished goods can be computed by adding the opening balance and closing balance in the respective accounts at year end and dividing it by two. Under this method, an average relationship between sales and working capital current assets and its various components has been established for the past years.

Regression analysis can be carried out through the graphic portrayals scatter diagrams or through mathematical formula. There are three regression analysis methods. They are simple linear regressions, simple curvilinear regression and multiple regression situations. The working capital can be forecasted with this regression analysis method even for the complex situations. It is particularly suitable for long term forecasting.

Summary Working capital forecasting methods: Cash Forecasting Method 2. Balance Sheet Method 3. Adjusted Profit and Loss Method 4.

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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 the company.

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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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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. 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 .

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factors determining working capital requirement 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 . What are factors determining working capital requirements in business? Ans: The factors determining working capital needs of a business firm are as follows: 1. Size of the firm: A large firm needs more working capital than a small firm.