The firms operating at large scale need to maintain more inventory, debtors, etc. If company is following liberal credit policy then it will require more working capital whereas if company is following strict or short term credit policy, then it can manage with less working capital also.
Sophistication of Working Capital Management: An increase in production from time to time will tend to increase the need of working capital.
Moreover, the time required in each process may differ from one process to another. Life is easier for businesses when interest rates are lower, and liquidity is easily available and not quite so expensive.
The degree of competition prevailing in the market-place has an important bearing on working capital needs. Some of the factors affecting the working capital of a company are as follows: Market Conditions The working capital requirements of a company depends on the degree of competition in the market.
If the enterprise makes use of such raw material which is available easily throughout the year, then less working capital will be required, because there will be no need to stock it in large quantity. Operating Cycle A service company usually has a short operating cycle or period.
For companies that are on the fast-track to growth, meeting the increasing demand for their products and services, brings with it the requirement to acquire more raw materials and speed up the rate of production.
The degree of influence of each factor varies from time to time. In case of trading concern or retail shop the requirement of working capital is less because length of operating cycle is small. Thus, in this phase, the company needs less working capital. Growth means the development of the scale of business operations production, sales, etc.
If the supply of raw materials is regular, then the company can keep less inventory stock. The finance manager must keep in mind following factors before estimating the amount of working capital.
They are management ability, involvement of employees, import policy, asset structure, utilization of resources, importance of labour, banking facilities and the like. In the case of service organization, large number of fixed assets are required and the services are rendered only on cash basis.
The type of business, firm is involved in, is the next consideration while deciding the working capital. Nature of business determines working capital requirement In the case of trading concern, there is a need of maintaining large inventories, receivables and cash.
The net profit is calculated after deduction of tax. Under a restrictive policy also referred to as aggressive policy the investment in current assets is low.
Therefore, the company requires moderate amount of working capital. Production cycle means the time involved in converting raw material into finished product. The wider the international operations of the business, the more diverse the risks and the greater the threat of the supply chain breaking down.
Online invoicing and payments allow the company to reduce their Days Sales Outstanding. If so, more amount of working capital is required.
So they require more working capital. Seasonal Variations The seasonal variations also influence the working capital: If the manufacturing process is long and complicated, then more working capital is required.
It is so, since, they don't have any stock in trade and they sell on a cash basis. [ Factors Influencing Working Capital ] 2. The size of Business: It may be argued that a firm’s size, measured in terms of assets or sales, affects the need for working capital.
Factors Affecting the Working Capital: The firm must estimate its working capital very accurately because excessive working capital results in unnecessary accumulation of inventory and wastage of capital whereas shortage of working capital affects the smooth flow of operating cycle and business fails to meet its commitment.
Working Capital Requirements and the Determining Factors in Pakistan 29 of the company relating to vendors, customers and products (Hall, ). Internal and external factors that affect working capital In any business, managing working capital is a never-ending task for the finance and accounting personnel.
A constant inflow of funds has to be ensured to keep the daily operations of. There are a number of factors influencing the working capital requirements of a company. These elements have a considerable extent of impact on the short-term performance of a firm. The factors influencing working capital requirements can be categorized into the following types.
The working capital cycle of a company is influenced by a number of factors. The nature of the business itself is a major aspect as in a service industry, there is no inventory to be maintained but in case of a manufacturing business- like garment industry, one has to maintain the inventory.Factors influencing working capital