Among the list of various factors, size for the sales is among the key elements in determining that the amount of working capital. In order to boost selling volume, your enterprise requires to maintain their current assets. During stages, lesser your working cycle period, lesser will be working capital requirement and vice versa. The requirement of working capital also changes based upon your nature for the business. For example, trading businesses need a lot more working capital as compared to manufacturing businesses. This really is because your trading business needs huge quantity of products as stocks which leads to huge amounts to working capital then manufacturing businesses. An additional crucial factor or component of working capital requirement relates to terms of credit permitted to the customer base. For example: one enterprise may perhaps extend credit facilities to 15 days for all their customers, while another enterprise in the same business may stretch credit facilities to 90 days only to select and reliable customer base only.
Top 10 – Key Factors of Working Capital Requirement:
Here are the top 10 – factors for requirement of working capital.
1. Type of Business:
In small companies, the initial investment in assets is actually lower and working capital requirement is higher. While big companies incur higher investment upon initial fixed capital than working capital requirements.
2. Nature of Interest:
If the customers interest in the company`s product increases which means that company will incur a high working capital. In case the demand / interest for the product is lower, then company may require lower working capital.
3. Size of Business:
If size of business is huge with wide range of strategies then to undertake those activities, requirement of working capital is more as compare to small size of businesses.
4. Turnover of Inventories:
In case inventories are huge but business have slow turnover, such enterprise will need more working capital. Vice versa, in case inventories are low but business have quick turnover, then that enterprise will need a low working capital.
5. Degree of Taxes:
Higher level of taxes means higher working capital requirements although lower level of taxes means requirement of low working capital.
6. Production Cycle / Manufacturing Cycle:
In case of continuous as well as constant production / manufacturing, working capital requirements will be higher. Whereas requirement of working capital will be lower in the event of random / discontinued / irregular / scattered production / manufacturing.
7. Business Cycle:
Working capital requirements is higher during the growth phase of a company. Once the company is stable, requirement of working capital get lower.
8. Length of Working Cycle:
Transformation of cash through different phases like: raw materials, finished product, sales and bills receivables to cash takes a certain time which is called length of working cycle. Longer your working cycle period, higher their working capital requirements.
9. Credit Finance Policy:
In the event that company buys raw materials on credit period and finished products are sold on cash basis, then the company will possess low working capital requirements. In case of reverse scenario, requirement for working capital will likely be increased.
10. Availability and Accessibility of Raw Materials:
Assuming raw materials is available and accessible at any given point of time, then the company need a low working capital, however, if there is a shortage of raw material, the company need to keep reserve raw material every time. In that case working capital requirement will be higher.
In the event that price of the goods / products of businesses is susceptible to wide variations to fluctuations. Thus it clearly boosts the requirement of working capital associated with the businesses. Similarly, here we have seen various other factors that plays a vital role in working capital requirement of a company. Do leave your feedback below. You additional knowledge will assist other reads as well.
- Tutorial Course - Basics of Working Capital Management for Beginners
» e-Learning Chapter 1: What is Working Capital Management
» e-Learning Chapter 2: Importance of Working Capital Management
» e-Learning Chapter 3: Objectives of Working Capital Management
» e-Learning Chapter 4: Types of Working Capital
» e-Learning Chapter 5: Components of Working Capital Management
» e-Learning Chapter 6: Working Capital Cycle
» e-Learning Chapter 7: Working Capital Finance
» e-Learning Chapter 8: Net Working Capital
» Currently Reading: Working Capital Requirement
» e-Learning Chapter 10: Working Capital Management Quiz For Beginners