Question:
Which of the following will require higher working capital?
Which of the following will require higher working capital?
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Remember: High competition forces businesses to be flexible with customers (more credit, more inventory), which drains cash and raises working capital needs.
Updated On: Jun 25, 2026
- Trading organisations
- Short processing cycles
- High level of competition
- Strict credit policy towards debtors
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The Correct Option is C
Solution and Explanation
Step 1: Concept
Factors Affecting Working Capital Requirements.
Step 2: Meaning
Working capital is the money required to fund the day-to-day operations of a business. Different operational environments dictate whether a firm needs more or less of it.
Step 3: Analysis
• Trading organizations need lower working capital because they don't have to fund a raw material-to-finished goods manufacturing process.
• Short processing cycles mean cash is tied up for a shorter duration, leading to lower working capital needs.
• A strict credit policy ensures cash is collected quickly from debtors, also resulting in lower working capital requirements.
• A high level of competition forces a company to maintain high inventories (to ensure instant delivery) and offer liberal credit terms to attract buyers, which significantly increases the need for working capital.
Step 4: Conclusion
High competition directly leads to larger inventory buffers and slower cash inflows, requiring higher working capital.
Final Answer: (C)
Factors Affecting Working Capital Requirements.
Step 2: Meaning
Working capital is the money required to fund the day-to-day operations of a business. Different operational environments dictate whether a firm needs more or less of it.
Step 3: Analysis
• Trading organizations need lower working capital because they don't have to fund a raw material-to-finished goods manufacturing process.
• Short processing cycles mean cash is tied up for a shorter duration, leading to lower working capital needs.
• A strict credit policy ensures cash is collected quickly from debtors, also resulting in lower working capital requirements.
• A high level of competition forces a company to maintain high inventories (to ensure instant delivery) and offer liberal credit terms to attract buyers, which significantly increases the need for working capital.
Step 4: Conclusion
High competition directly leads to larger inventory buffers and slower cash inflows, requiring higher working capital.
Final Answer: (C)
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