Question

Explain the following factors affecting working capital requirements:-
(i) Level of competition
(ii) Seasonal factors
(iii) Production cycles.

Answer 1

• Level of Competition:
  

If the market is competitive then company will have to adopt liberal credit policy and to supply goods on time. Higher inventories have to be maintained so more working capital is required. A business with less competition or with monopoly position will require less working capital as it can dictate terms according to its own requirements.

• Seasonal Factors:
  

The working capital requirement is constant for the companies which are selling goods throughout the season whereas the companies which are selling seasonal goods require huge amount during season as more demand, more stock has to be maintained and fast supply is needed whereas during off season or slack season demand is very low so less working capital is needed.

• Production Cycle:
  

Production cycle means the time involved in converting raw material into finished product. The longer this period, the more will be the time for which the capital remains blocked in raw material and semi-manufactured products.Thus, more working capital will be needed. On the contrary, where period of production cycle is little, less working capital will be needed.