Factors Influencing Working Capital Requirements

There are a number of factors influencing the working capital requirements of a company. These elements have a considerable extent of impact on the short-term performance of a firm. The factors influencing working capital requirements can be categorized into the following types:
Seasonality of operations:
The companies that have graded seasonality of their functions normally have considerable fluctuations in their working capital requirements. From another viewpoint, a company producing lamps that are sold equally throughout the year has a tendency towards steady working capital requirements.

Type of business:
The working capital requirement of a company is intimately associated with the type of its business. Service provider firms like a transport company or electricity supply corporation that have a short operating cycle and where the sales are primarily done based on cash, have a minor working capital requirement. On the contrary, production firms like a machine tools unit that has a long operating cycle and where the sales are done principally on credit, have fairly large working capital requirement.

Market conditions: The level of competition existing in the market has a significant influence on the necessity of working capital. If the competition is high, the working capital requirements are also high. If the market is steady and competition is not so high, the working capital requirements are not so urgent.

Production policy: A firm that has marked seasonal variations in sales can adopt a production policy that might decrease the abrupt fluctuations in working capital requirements.

Conditions of supply: The inventory of stores, spares and raw materials counts on the conditions of supply. In case the supply is timely and sufficient, working capital requirement is less. Nevertheless, if supply is irregular and short, working capital requirement is more.

Thus it can be concluded that the factors influencing working capital requirements have a significant degree of bearing on the smooth running of a company.

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Last Updated on : 27th June 2013

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