Working Capital and Its factors and determinent of working capital \12 factors which affects the requirement of working capital of the company

Meaning of working capital

-working capital is the amount of capital that a business has available to meet the day to day cash requirements of its operations.

-Working capital is the difference between resources in cash or readily convertible into cash (current assets)and organizational commitment for which cash will soon be required (current liabilities).

-It refers to the amount of current assets that exceeds current liabilities (i.e. CA - CL)

-working capital refers to that part of the firm’s capital ,which is required for financing Short term or current assets  such as Cash ,Marketable securities, Debtors and Inventories. Working capital is also known as Revolving or circulating capital or short term capital.

In other words ,working capital is also termed ass the money required to meet out day to day operational expenditures of the business.

Operational expenditures are recurring (means repeating) in nature and occur in daily ,weekly bases within the organization.

Fixed capital = money invested in the acquisition of fixed assets.(it means fixed capital are those which are used to acquire or purchasing of the fixed assets like land ,building, plant and machinery ,etc)

Working capital = money invested in the acquisition of current assets.(it means working capital are those which are used to purchase and acquire the current assets like bills receivables, cash in hands, etc)

Factors affecting /determining working capital Requirements.

There are some factors those affects to the working capital requirements and affects the decision of the working capital of the company.

Ø Nature and size of business

The WC requirements of a firm is closely related to the nature of the nature of the business . We can say that trading and financial firms have very less investment in fixed assets but require a large sum of money to be invested in WC . On the other hand Retail stores, for example, have to carry large stock of variety of goods little investment in the fixed assets.

Also a firm with a large scale of operations will obviously require more WC than the smaller firm .

Ø Manufacturing cycle

It starts with the purchase and use of raw materials and completes with the production of finished goods. Longer the manufacturing cycles larger will be the working capital requirement ,this is seen mostly in the industrial products.

Ø Business fluctuation  

When there is an upward swing in the economy ,sales will increase also the firm’s investment in inventories and book debts will also increase ,thus it will increase the working capital requirement of the firms and when the economy do not grow or growing perpetually(from a same rate )and sales were declining or being perpetual (from a same pace) then there is no need of extra surplus.

Ø Production policy

To maintain an efficient level of production the firm’s may resort to normal production even during the slack season. This will lead to excess production and hence the funds will be blocked in the form of inventories for a long time, hence provisions should be made accordingly. Since the cost and risk of maintaining a constant production is high during the slack season some firm’s may resort to producing various products to solve their capital problems. If they do not, then they require high working capital.

Ø Firm’s credit policy

If the firm has a liberal credit policy its funds will remain blocked for along time in form of debtors and creditors. Normally industrial goods manufacturing will have a liberal credit policy ,whereas dealers of consumer goods will a tight credit policy.

Ø Availability of credit

If the firm gets credit on liberal items it will require less working capital since it can always pay its creditor later and but for those companies whose company credit policy is not liberal or have strong credit policy those company pays their creditor on the time.
eg.cococola

Ø Growth and expansion activities

It is difficult precisely to determine the relationship between volume of sales and need for working capital. The need for working capital does not follow the growth but precedes it .Hence ,if the firms is planning to increase its business activities ,it needs to plan its working capital requirements during the growth period.

Ø Conditions of supply of raw material

If the supply of resource material is scare the firm may need to stock it in advance and hence need more working capital and if the supply of raw material is good and its surplus or up to the mark then there is no need to stock the raw material and therefore there is no need to maintaining the surplus working capital .The surplus amount can be used or invested somewhere else through company.

Ø Seasonal Variation in business

There are certain industries which purchase raw material in the production season such as cotton ,rubber and consume the material in the of season for the manufacturing of products .These industries require large amount of working capital to purchase the raw material in the production season and play the wage costs in the off season.

Ø Risk in business

A business like the oil exploration involves great risk .The business may or may not be able to find out the oil by digging of wells. The business needs huge amount of working capital in such risky enterprises.

Ø Size of labour force

If the size of labour force employed in the manufacture of a product is fairly ,large,(labour extensive),the business will need a greater amount of working capital .In capital intensive industries lesser amount of working capital is required.

Ø Price level change

If the prices are rising very rapidly in the country the business will require greater amount of working capital to maintain the same current assets and the price is declining then the business needs less working capital.