Factors Influencing Working Capital Requirements and Management

Factors Influencing Working Capital Requireme
nts
Nature of busines
Conditions of supply
Production Policy
Seasonal Operations
Credit Availability
Credit policy of enterprises
Growth and expansion
Price level change
Circulation of working capital
Volume of Sale
Liquidity and profitability
Management ability
External Environment
Concerns in public utility services need less working capitals. Example, if a concern is engaged in electric
supply, need less current assets.
The supply of inventory prompt and adequate, less funds will be needed.
In case of seasonal flutuation sales, production will fluctuate accordingly and
utilise requirments of working capital will also fluctuate.
It is not always possib
le
 shift the burden of production and sale to slack
.
If 
credit facility is avai
lability
 from banks and suppliers on favourable term
conditions, less working capital will be needed.
In some enterp
ries
 most of the sale is at cash and even it is recei
ved
 advance
while, in other sales is at credit and paym
ent
 received only after a month or two
.
It is difficult to precisely determine the relationship between volume of sales and the working capital
needs.
With the 
increase in price level more and mre working capital will be needed for the same magnitude of
current assets.
Less working capital will be needed with the increase in circulation of working
capital and vice-versa
This is directly indicated with working capital requirement, with the increase in
sales more working capital is neede
d
 for finis
h
ed goods
.
With development of financial institutions, means of communication, transport
facility, etc.
There is a negative relationship between liquidity and profitability.
Pr
oper co-ordination in production and distribution of goods may reduce the requirement of working capital
It protects a business form the adverse of shrinkage in the values of current
assets.
It is possible to pay all the current oblig
ation
 promptly and to take advantage of
cash discounts.
It ensures, to a greater extent maintenance of a company's credit standing and
pr
oduction
 for such emergencies as strikes, floods, fires etc.
,
It permits the carrying of inventorie
s
 level that would enable a business to serve
satis
fy 
the needs of its customers.
It enables a company to extend favorties credit terms to its customers.
It enables a company to operate its business more efficiently because there is no delay in obtain
materials, etc., because of credit difficulties.
It enables a business to with stand period depression smoothly.
There may be operating losses or decrese retained earnings.
There may be excessive non-operating or extraordinary losses.
The management may fail to obtain funds from other sources for purposes of expansion.
There may be an unwise dividend policy
.
Current funds may be invested in non-current assets
.
The management may fail to accumulate
 
funds necessary for meeting debentures on maturity.
Increasing price may necessitat bigger investments in inventories and fixed asset.
Thank you
Ms. Nithya Devi
Asst. Prof. of Commerce (CA)
Bon Secours College for Women,
Thajavur
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Factors such as nature of business, supply conditions, production policy, seasonal operations, credit availability, growth, and external environment influence the working capital needs of a business. Factors like credit availability, seasonal sales fluctuations, and liquidity affect the amount of working capital required. Understanding these factors is crucial for efficient working capital management.


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  1. Factors Influencing Working Capital Requirements Nature of busines Conditions of supply Production Policy Seasonal Operations Credit Availability Credit policy of enterprises Growth and expansion Price level change Circulation of working capital Volume of Sale Liquidity and profitability Management ability External Environment

  2. Concerns in public utility services need less working capitals. Example, if a concern is engaged in electric supply, need less current assets. The supply of inventory prompt and adequate, less funds will be needed.

  3. In case of seasonal flutuation sales, production will fluctuate accordingly and utilise requirments of working capital will also fluctuate. It is not always possible shift the burden of production and sale to slack.

  4. If credit facility is availability from banks and suppliers on favourable term conditions, less working capital will be needed. In some enterpries most of the sale is at cash and even it is received advance while, in other sales is at credit and payment received only after a month or two.

  5. It is difficult to precisely determine the relationship between volume of sales and the working capital needs. With the increase in price level more and mre working capital will be needed for the same magnitude of current assets.

  6. Less working capital will be needed with the increase in circulation of working capital and vice-versa This is directly indicated with working capital requirement, with the increase in sales more working capital is needed for finished goods. With development of financial institutions, means of communication, transport facility, etc.

  7. There is a negative relationship between liquidity and profitability. Proper co-ordination in production and distribution of goods may reduce the requirement of working capital

  8. It protects a business form the adverse of shrinkage in the values of current assets. It is possible to pay all the current obligation promptly and to take advantage of cash discounts. It ensures, to a greater extent maintenance of a company's credit standing and production for such emergencies as strikes, floods, fires etc., It permits the carrying of inventories level that would enable a business to serve satisfy the needs of its customers.

  9. It enables a company to extend favorties credit terms to its customers. It enables a company to operate its business more efficiently because there is no delay in obtain materials, etc., because of credit difficulties. It enables a business to with stand period depression smoothly. There may be operating losses or decrese retained earnings. There may be excessive non-operating or extraordinary losses. The management may fail to obtain funds from other sources for purposes of expansion.

  10. There may be an unwise dividend policy. Current funds may be invested in non-current assets. The management may fail to accumulate funds necessary for meeting debentures on maturity. Increasing price may necessitat bigger investments in inventories and fixed asset.

  11. Thank you Ms. Nithya Devi Asst. Prof. of Commerce (CA) Bon Secours College for Women, Thajavur

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