Question

(a) Explain the following factors affecting the working capital requirement of a company :
(i) Level of competition
(ii) Production cycle
(iii) Scale of operations

Hint:

More time, size, or rivalry? Think higher working capital!

Answer 1

(i) Level of Competition: If a firm is in a highly competitive market, it may require additional working capital to offer better customer services, maintain larger inventories, or give credit to customers to stay competitive.
(ii) Production Cycle: The time taken to convert raw materials into finished goods affects working capital. Longer production cycles need more funds tied up in inventory, increasing working capital needs. 
(iii) Scale of Operations: Large-scale businesses need more working capital to manage raw materials, production, and distribution. Bigger firms typically maintain greater inventories and have higher overheads. 
Final Answer: More competition, longer production, and large operations = higher working capital.