What Are The Factors Which Can Affect Working Capital?


8 Answers

Anonymous Profile
Anonymous answered

The factors affecting the Composition of Working Capital are:-

1.   Nature of Business

Different companies operating in different Industries have different Working Capital requirements. A purely Trading Organization will basically have finished goods Inventory, Accounts Receivable and Cash as Current Assets and Accounts Payable as Current Liability.
On the other hand, Capital Goods manufacturing and Trading Companies will have a high proportion of Current Assets in the form of inventory of Raw Materials and Work-in-Progress.
Thus, the nature of Business is directly linked to the requirement of Working Capital.

2.   Nature of Raw Material Used

The nature of Raw Material used in the manufacture of finished goods greatly influences the quantum of Raw Material Inventory. For example, if the raw Material is an agricultural product whose availability is pronouncedly seasonal in character, the proportion of Raw Material Inventory to Finished Goods Inventory will be quite high.
Similarly companies using Imported Raw Materials with long lead time tend to have a high proportion of Raw Material Inventory. In the case of Capital Goods Manufacturing Company the demand for whose product is growing over time, the tendency will be to have high Inventory of Raw Material and Components.

3.   Process Technology Used

In case the Raw Material has to go through several stages during the process of production, the Work-in-Progress Inventory is likely to be much higher than any other item of the Current Assets thereby increasing the need of Working Capital.

4.   Nature of Finished Goods

The nature of Finished Goods greatly affects the amount of finished goods inventory. For example, if the finished goods have a short span of 'shelf-life' as in the case of cigarettes the finished goods inventory will constitute a very low percentage of current assets.
In the case of companies the demand for whose finished goods is seasonal in nature, as in the case of fans, the inventory of finished goods will constitute a high percentage of total current assets. This is mainly because from the point of view of the fixed costs to be incurred by the company it would be more economical to maintain an optimum level of production throughout the year than by stepping up production operations during the busy season.

5.   Degree of Competition in the Market

When the Degree of Competition in the market for finished goods in an industry is high, then companies belonging to the Industry may have to resort to an increased credit period to its customers, partially lowering credit standards and similar other practices to push their products. These practices are likely to result in a high proportion for Accounts Receivables thereby increasing the need for Working Capital.

6.   Growth and Expansion

As the company grows, it is logical to expect that a larger amount of working capital is required. It is, of course, difficult to determine precisely the relationship between the growth in volume of business of a company and the increase in the working capital. The composition of working capital also shifts with economic circumstances and corporate practices. Other things being equal, growth Industries require more working capital than those that are static. The Critical fact however, is that the need for increased working capital funds does not follow the growth in business activities but precedes it. Advance planning of working capital, is therefore a continuing necessity for a growing concern.
Nouman Umar Profile
Nouman Umar answered
Working capital is amount of funds invested in the current assets of a business. It is required to purchase raw material, payment of wages, electricity and gas bills, stocking of goods, paying short term loans, taxes and advertising bills. It is as important as circulation of blood for the business, working capital is essential to maintain smooth running, prosperity and stability of the business. It is very important for the daily operations of the business. There are many factors which can affect the working capital directly or indirectly.

One of them is nature of business. The working capital requirement of an enterprise basically depends upon the nature of its business. For example a trading concern requires large amount of working capital for investments in stocks, receivables and cash. It requires less investment in fixed assets. A business where the proportion of cost of raw material to be consumed to total cost of production is high, the amount of working capital required is large. The second factor is size of business the amount of working capital depends upon the scale of operation of business. The larger the size of the business unit the larger is the requirement of working capital. So the working capital is important for the business success.
Anonymous Profile
Anonymous answered
1. Nature and Character of Business
2. Size of Business/Scale of Operations
3. Production Policy
4. Manufacturing Process/Length of Production Cycle
5. Seasonal Variations
6. Working Capital Cycle
7. Credit Policy
8. Business Cycles
9. Rate of Growth of Business
10. Earning Capacity and dividend Policy
11. Price Level Changes
Anonymous Profile
Anonymous answered
1-Nature of the business
2-market and demand condition
3-technology and manufacturing policy
4-credit policy
5-availability of credit from suppliers
6-operating efficiency
7-price level changes
8-seasonality of operations
9-production policy
10-business cycle
Nico Le Profile
Nico Le answered
Internal factors
1. Company size
2. Growth rate
3. Organizational culture
4. Sophistication of working capital
5. Borrowing and investing positions, activities, and capacities

External Factors
1. Banking services
2. Interest rates
3. New technologies and new product
4. The economy
5. Competitors
Anonymous Profile
Anonymous answered
1) which items are involve in operating cycle
2) how long each item remain in the operating cycle
3) how long each item remain in the operating cycle
Anonymous Profile
Anonymous answered
Type/Nature Of Business

Working capital level is generally higher in manufacturing based versus service base organizations

Depends on the Volume of Sales

The higher the sale, the higher is the level of working capital required


Peak seasons like festive seasons require a higher level of working capital

Length of Operating And Cash Cycle

A longer operating and cash cycle increases the level of working capital
Anonymous Profile
Anonymous answered
Factors are : Raw material , work in progress ,finished goods, receivables, capital the firm wants to hold as cash for the urgent cash needs...

Answer Question