Question

What combination of the following factors influences the working capital requirement?
(i) Market Conditions
(ii) Production Policy
(iii) Firm's goodwill
(iv) Supply conditions

• A. (i), (ii) and (iii)
• B. (ii), (iii) and (iv)
• C. (i), (iii) and (iv)
• D. (i), (ii) and (iv)

Answer 1

The correct option is D (i), (ii) and (iv)

Factors influencing the working capital requirement are:

• Market conditions: If the competition is intense, then the company has to spend a lot of money on running advertising campaigns and sales promotion. It will also have to keep more stock and sell on credit. So, it will require more working capital.
  
• Production policy: A service company usually has a short operating cycle or period. It also sells on a cash basis. So, it requires less working capital. For example, electricity and transport companies.
  

A manufacturing company usually has a long operating cycle. It also sells on a credit basis. Therefore, it requires more working capital. For example, machine tools companies.

• Supply conditions:The working capital requirements of the company depends on the conditions of supply:
  
• If the supply of raw materials is regular, then the company can keep less inventory (stock). So, it will require less working capital.
  
• But, if the supply is irregular then the company has to hold more stock. Therefore, in such a case, it will need more working capital.