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Question

What factors influence the working capital need in a business?


Solution

The factors that influence the working capital need in business are as follow: 

1. Cost: There are two types of cost viz., the cost of procurement of funds and cost of utilising the funds. Both these costs should be taken into account while deciding about the source of funds.
2. Financial strength and stability of operations: In the choice of source of funds, business should be in a sound financial position so as to be able to repay the principal amount and interest on the borrowed amount. When the earnings of the organisation are not stable, fixed charged funds should be carefully selected as these add to the financial burden.
3. A form of organisation and legal status: A partnership firm, for example, cannot raise money by issue of equity shares as these can be issued only by a joint stock company.

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