Posted by Anjali Kaur on Oct 16, 2021
working capital

Working capital and Factors affecting the same

Working Capital Definition
Working Capital

Working capital refers to an excess of current assets over current liabilities. It can be negative when current liabilities are greater than current assets. The networking capital indicates the liquidity position of the company. The positive net working capital implies a positive liquidity position whereas negative net working capital indicates a weak and poor liquidity position. Let’s discuss the factors affecting the working capital.

Feel free to join my YouTube channelFacebook group for Business Studies students, subscribe to this website, and get a monthly collated mailer.

Factors affecting the working capital

1. Nature of business

The basic nature of a business influences the amount of working capital required. A trading organization and service indicators usually need a smaller amount of working capital compared to a manufacturing organization. Therefore, manufacturing organizations required more raw materials, machinery, and more cost is involved in preparing goods.

2. Scale of operation

Firms that operate on a higher scale need to maintain more stocks, therefore, such firms require more working capital compared to the organization which operates on a lower scale.

3. Business Cycle

During the boom period market is flourishing that is, there is more demand, more production, more stock, more debtor which means more working capital. Whereas, during depression there is less demand, less stock, to be maintain so less working capital is required.

4. Seasonal factors

The company which is selling seasonal goods requires more working capital during the season as there is more demand and more stock has to be maintained whereas, during the off-season, demand is very low so less working capital is needed.

5. Production cycle and technology

If the production cycle is long then more working capital will be required, therefore, it will take a long time for converting raw material into finished goods whereas when the production cycle is small then less working capital is required.

Similarly, if the company is using a labor-intensive technique then more working capital is required because the company needs to maintain enough cash flow for making payment to labor, whereas if the company is using the capital intensive technique of production then less working capital is required because investment in machinery is fixed.

6. Credit Allowed

Credit policy refers to the average period for the collection of sale proceeds. If company is following a liberal credit policy then it will be required more working capital whereas if the company is following a strict or short-term credit policy, then it can manage with less working capital.

7. Credit availed

If suppliers of raw materials are giving long-term credit then the company can manage with less amount of working capital whereas if suppliers are giving only short-term credit then the company will require more working capital to make payments to creditors.

8. Operating efficiency

A firm having a high degree of operating efficiency requires less amount of working capital as compared to the firm having a low degree of efficiency which requires more working capital.

9. Availability of raw material

If raw materials are easily available and there is a ready supply of raw material then the firm requires less working capital as they need not maintain stock. Whereas if the supply of raw material is not enough then large working capital is required.

10. Growth prospects

If firms are planning to expand their business it will require more working capital as for expansion they need to increase production which requires more raw material etc.

11. Level of competition

If the market is competitive then the company will have to adopt a liberal credit policy to supply goods on time which means more working capital is required. In case there is no competition like monopoly then less work is required.

12. Inflation

If there is an increase in price, then the price of raw materials and cost of labor will increase, thus more working capital is required. However, the effect of rising prices on working capital will be difficult for different businessmen.

Thank You!

You can read more topics related to business studies:

Consumer Protection

What is marketing management?
Consumer Protection Act, 1986

Marketing Mix
The 5 marketing management philosophies

Advertising in Promotion Mix
Marketing Mix- product

Promotion- Marketing Management
What are the functions of marketing management?

Marketing Mix Element- Price

Personal Selling
Packaging as an element of the marketing mix

Place mix in marketing

Feel free to join our Facebook group and subscribe to this website to get daily educational content in your mailbox.

Happy Learning!

Disclosure: Some of the links on the website are ads, meaning at no additional cost to you, I will earn a commission if you click through or make a purchase. Please support me so that I can continue writing great content for you.

Notify of
Inline Feedbacks
View all comments

Learn with Anjali started because there wasn't an easy-to-consume resource to help students with their studies. Anjali is on single-minded mission to make you successful!

If you would like to suggest topics, leave feedback or share your story, please leave a message.

Leave a message