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Determinants of working capital

Updated: 9/14/2023
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Q- DETERMINANTS OF WORKING CAPITALThere are lots of factor of determinants of working capital

1) Nature of business - working capital requirement of a firm basically influenced by the nature of its business trading and financial forms have a very small investment in fixed assets, but require a large sum of money to be invested in working capital. Retails stores, for example must carry large stock of a verity of good to satisfy varied and continuous demand of their customer.

2) Market and demand condition - the working company related to its sales . it is difficult to precisely determine the relationship between the volume of sales and working capital need. Current assets will have to be employed before growth takes place. Then necessary to make planning of working capital for a growing firm on a continuous basis

3) Technology and manufacturing policy - the manufacturing cycle comprise of the purchase and use of raw material and the production of finished goods. Longer the manufacture cycle, larger will be the firm's working capital requirement. For example, the manufacturing cycle in the case of a boiler, depending on its size, may range between six to twenty four month. On the other hand the manufacturing cycle of product such as detergent powder, soap, ice creams etc. may be a few hour extend product take a large time

4) Credit policyof the firm affect the working capital by influencing the level of debtor. The credit term to be guaranteed to customer may depend upon the norm of the industry to which the firm belong. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practice. The firm should use discretion in granting credit term to us customer

5) Operating efficiency - the operating efficiency of the firm relates to the optimum utilization of all its resource at minimum costs. The efficiency in controlling operating cost and utilizing fixed and current assets leads to operating efficiency. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. Better utilization improves profitability and helps the releasing on working capital

6) Conditions of supply: the inventory of raw material, spares and stores depends on the conditions of supply. if the supply is prompt and adequate, the firm can manage with small inventory. however, if the supply is unpredictable and scant then the firm, to ensure continuity of production, a similar policy may have to be followed when the raw material is available only seasonally and production operations are carried out round the year

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