Question

State how the following factors affect the requirements of working capital of a company :

(i) Seasonal factors

(ii) Production cycle

(iii) Inflation

Hint:

For each factor, say whether the working capital need goes up or down and give a reason.

Answer 1

Step 1: Understand the question:
Working capital is the money needed for day to day running, such as stock, debtors and expenses.
The question asks how three factors change this need.

Step 2: (i) Seasonal factors:
Some businesses sell more in certain seasons, such as woollens in winter.
In the busy season they need more working capital to buy material and meet sales.
In the slack season the need falls.

Step 3: (ii) Production cycle:
Production cycle is the time between buying raw material and getting finished goods.
A longer cycle keeps money locked in work in progress for more time.
So a longer production cycle needs more working capital.

Step 4: (iii) Inflation:
When prices rise, a firm has to pay more for the same quantity of material and other items.
So it needs more working capital to keep the same level of output.
Higher inflation means a higher working capital need.

Final Answer:
Peak seasons, a longer production cycle and rising prices all increase the working capital requirement.