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FACTORS DETERMINING WORKING CAPITAL REQUIREMENT

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❶It can, therefore, perform its business activities with less working capital than a firm without such credit facility. Out of the profits, income tax has to be paid.

Factors Determining Working Capital

Thursday, 23 June 2011
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According to the new provisions of the SEBI, all the companies are compulsorily to declare the dividend to the shareholders. So the dividend policy has a dominant influence on the working capital position of the organisation. As per the new provisions, need for the working capital is met with retained earnings. Once dividend is declared and the same has to be paid in cash requires large amounts from the pool of working capital.

Need for the working capital depends upon the amount of cash required by the company for its various purposes. If greater the requirements of cash, the higher will be the working capital needs of the company and vice versa. Apart from the above points, some other factors also affect the working capital requirements. For example, lack of transport and communication facilities, tariff policies of government etc.

When this dividend is declared, the company has to pay all in cash. This requires a huge amount of working capital. Excluding the above points, a few other factors that also put affect the requirement of working capital in an organization.

For example, tariff policies of government, lack of transport and communication, etc. Enter your keyword Search. Home Determinants of Working Capital: Length of Manufacturing Cycle: Production Policies For determining the working capital of an organization, production policies are much important.

Terms of Purchases and Sales If an organization allows continuous credit by its suppliers, it is expected to the postponement of the payment. Fluctuations in Supply A few of the firms purchase raw materials to a great extent. Seasonal Variation Seasonal changes put an impact on the financial stability of the organization. Requirement of Cash A company needs cash for its different purposes. One namely is to manufacture some other product during the off-season and concentrate on the main line during the season of the main product.

But it may not be feasible in all the cases. There are business cycles resulting in marked variations in business conditions. There is an upward swing of business conditions leading to a boom when the business activities are at their peak. It is followed by a downward phase called recession when business activities decline.

The downward phase ends in a depression, completing the business cycle. Then again, there is a recovery to start a new business cycle. During the recovery, the working capital requirements increase while during the stock period, the working capital requirements decrease. In an industry where raw material is available only in a particular season and the firm has to buy raw material in bulk in that reason to enoure uninterrupted production of finished goods, the working capital requirements will be more.

When in cases where the supply of raw material is unpredictable, the firm may have to accumulate stock of raw material requiring more working capital. The terms of credit granted to customers normally depend upon the norms followed in the industry in which the firm is engages. But the firm has some flexibility within the norms. Ideally, the firm should be use discretion in granting credit to its customers. Different terms of credit should be offered to different types of customers.

A liberal credit policy without caring much for the creditworthiness of the customers will land the firm in trouble and the requirements of working capital will also unnecessarily increase. If the firm is able to procure liberal terms of credit from suppliers of raw material, its net working capital requirements will be reduced. Stock turnover ratio refers to the speed with which finished goods are converted into sales.

If a firm has a high stock turnover ratio as in the case of a bakery, its working capital requirements will be less.


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Factors Determining Working Capital Requirement Working capital requirement is influenced by various factors. In fact, any and every activity of a company affects the working capital requirements of .

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Factors determining working capital requirements. The quantum of working capital is depending upon a large number of factors. It is very difficult to pin point the factor which is highly responsible. The degree of influence of each factor varies from time to time.

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The working capital needs of a firm are determined and influenced by various factors. A wide variety of considerations may affect the quantum of working capital required and these considerations may vary from time to time. The working capital needed at one point of . Production policy of the organisation is also an important factor for determining working capital. In case of labour intensive industry the quantum of working capital is required only in smaller amount.

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Factors Determining Working Capital Requirement Table of Contents [hide] * 1 Factors Influencing Working Capital Management Nature of the Industry / Business Seasonality of Industry and Production Policy Competition Production Cycle Ti. Determinants of Working Capital: (or) Factors Determining Working Capital; Determinants of Working Capital: (or) Factors Determining Working Capital: Nature of Business; For determining the working capital of an organization, production policies are much important. If the organization is labor-intensive, then it requires minimal working.