What Is Working Capital And Determinants Of Working Capital Requirement?


6 Answers

makav kappy Profile
makav kappy answered
There are lots of factor of determinants of working capital
1) Nature of business - working capital requirement of a firm basically influenced by the nature of its business trading and financial forms have a very small investment in fixed assets, but require a large sum of money to be invested in working capital. Retails stores, for example must carry large stock of a verity of good to satisfy varied and continuous demand of their customer.
2) Market and demand condition - the working company related to its sales . It is difficult to precisely determine the relationship between the volume of sales and working capital need. Current assets will have to be employed before growth takes place. Then necessary to make planning of working capital for a growing firm on a continuous basis
3) Technology and manufacturing policy - the manufacturing cycle comprise of the purchase and use of raw material and the production of finished goods. Longer the manufacture cycle, larger will be the firm's working capital requirement. For example, the manufacturing cycle in the case of a boiler, depending on its size, may range between six to twenty four month. On the other hand the manufacturing cycle of product such as detergent powder, soap, ice creams etc. May be a few hour extend product take a large time

4) Credit policy of the firm affect the working capital by influencing the level of debtor. The credit term to be guaranteed to customer may depend upon the norm of the industry to which the firm belong. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practice. The firm should use discretion in granting credit term to us customer
5) Operating efficiency - the operating efficiency of the firm relates to the optimum utilization of all its resource at minimum costs. The efficiency in controlling operating cost and utilizing fixed and current assets leads to operating efficiency. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. Better utilization improves profitability and helps the releasing on working capital
6) Conditions of supply: The inventory of raw material, spares and stores depends on the conditions of supply. If the supply is prompt and adequate, the firm can manage with small inventory. However, if the supply is unpredictable and scant then the firm, to ensure continuity of production, a similar policy may have to be followed when the raw material is available only seasonally and production operations are carried out round the year
Ellie Hoe Profile
Ellie Hoe answered
Working capital is defined as difference between the company's assets and liabilities. It is good to have higher working capital so that company can have enough liquid money to meet its short term obligations. However too much heavy amount of working capital can depict that company is not using money to its best. For that reason, working capital ratios are used to see the management of overall cash and liquid assets. One of the determinants of working capital can be the size and structure of organization. Usually companies which are bigger in size have higher working capital requirements therefore for comparison purposes, size of the organizations should be kept in minds for analysis. The nature of the business also affects working capital requirements. Banks usually have more liabilities in terms of short terms investments therefore their working capital requirement can be higher.
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Rafi-ur-Rahman Marwat
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Steven Vakula Profile
Steven Vakula answered
Working capital is what the company has as resources to fund operations for a period which is usually a year. Working capital can take different forms that of cash, cash alternatives such a receivables and inventory, other assets which are needed for the production of income or investing sources, financing sources such as loans, payment delay times and loans from owners, shareholders or partners and equity investments which would be the sale of stock or partnership interest of the company. The final source would be net income from operations. A companies ability to generate cash or it's equivalent or secure financing or equity investment and generate a profit from operation will give one an idea of the companies ability to continue as a going-concern.
Anonymous Profile
Anonymous answered
Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories.  Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets.  Working Capital is also known as revolving or circulating capital or short-term capital.

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