FACTORS AFFECTING WORKING CAPITAL
1. Nature of business
2. Production policy
3. Credit policy
4. Inventory policy
5. Abnormal factor
6. Market conditions
7. Conditions of supply
8. Business cycle
9. Taxation policy
10. dividend policy
11. Operating efficiency
12. Price level changes
13. Depreciation policy
14. Availability of raw material
NATURE OF THE INDUSTRY / BUSINESS
The management of working capital is completely different from industry to industry. A simple comparison of the service industry and manufacturing industry can clarify the point. In a service industry, there is no inventory and therefore, one big component of working capital is already avoided. So, the nature of the industry is a factor in determining the working capital requirement.
SEASONALITY OF INDUSTRY AND PRODUCTION POLICY
Businesses based on seasons like manufacturing of ACs whose demand peaks in summer and dips in winter. The requirement of working capital will be more in summer compared to winter if they are produced in the fashion of their demand. The policy of producing throughout the year can smoothen the fluctuation of working capital requirement.
COMPETITION
If the industry is competitive, quick response to customer needs is compulsory and therefore a higher level of inventory is maintained. Liberal credit terms are also mandatory with good service to survive in the market. So, higher the competition, higher would be the requirement of working capital.
PRODUCTION CYCLE TIME
The production cycle time refers to the time required for converting the raw materials into finished goods. Higher, this time, higher would be the time of blocking funds in the working capital.
CREDIT POLICY
Liberal credit policy demands a higher level of working capital and tight credit policy reduces it.
GROWTH AND EXPANSION
Some industries are static and others are growing. Obviously, growing industry grows the requirement of working capital also as compared to static industry.
RAW MATERIAL SHORT SUPPLY
If the raw material supply is not smooth for any reason, companies tend to store more of raw materials than needed and that increased requirement of working capital.
NET CASH PROFIT
Profit or retained earnings are one of the sources of working capital for the business. It will depend on net cash profits as to how much working capital financing is required from external sources.
TAXES
Taxes are often paid in advance. This also blocks a part of working capital. Depending on the tax environment of the industry, working capital needs are also affected.
DIVIDEND POLICY
Dividend policy determines the level of retained profits with the business and retained profits are also used for working capital. This is how; dividend policy affects the need for working capital.
PRICE LEVELS
The price levels of inventory and other expenses such as labour rates etc increase the working capital requirement. If the company also is able to increase the price of their finished goods, it reduces this impact.
