Question

Explain briefly any four factors affecting working capital requirement of an organisation.

Hint:

To remember factors affecting Working Capital, use the ``Cash Cycle'' logic: any factor that slows down the conversion of goods into cash (like manufacturing or long credit periods) will increase your working capital requirement.

Answer 1

Concept: Working capital is the capital required for day-to-day operations. The amount needed varies based on several operational factors.
Determining variables that impact liquidity.
• Nature of Business: A trading firm needs less working capital than a manufacturing firm (which has long production cycles). • Scale of Operations: Larger organizations naturally require more inventory and cash to sustain operations. • Business Cycle: During a "Boom" period, sales are high, necessitating more working capital to meet demand. • Credit Allowed: If a firm allows long credit periods to customers, it needs more working capital to bridge the cash gap.