Question

Inflation has affected working captial requirement of all firms.

(i) What do you think about the impact of inflation on working capital?

(ii) Give reasons in support of your answer.

Answer 1

(i) Working capital is the difference between current assets and current liabilities which implies the extent of cash available to satisfy short-term obligations generated from current liabilities. As working capital deals with short-term obligations of a business, inflation will inflate the short-term obligations pressurising the company generate more revenue in the short-term. Thus, inflation will make the business require more working capital.

(ii) The reasons are as follows :

(a) Inflation will increase the cost of raw materials and human resources.

(b) Inflation will adversely affect the demand for the products depending on the nature of the product sold by the business. If the demand for the product is inelastic then business' sales won't be affected but working capital will be higher. If the demand is elastic then less working capital will be required.