DETERMINANTS OF WORKING CAPITAL
There are lots of factor which determines the requirement of total capital working of a firm. Different firms are affected differently by these factors. It also changes according to the need of the firm. Time is also an important factor to determine the total working capital of a firm. Mainly followings are the factors which determine the total capital working of a firm: -
1. NATURE OF BUSINESS
2. PRODUCTION CYCLE
3. BUSINESS CYCLE
4. PRODUCTION POLICY
5. CHANGES IN PRICE LEVEL
6. GROWTH AND EXPANSION
7. AVAILABILITY OF RAW MATERIALS
8. DIVIDEND POLICY
9. DEPRECIATION POLICY
NATURE OF BUSINESS:
The Nature of the business of the firm is directly related with the working capital requirements of the business. Firms maintain adequate amount of inventories, book debts and cash according to the nature of the business. The manufacturing companies maintains huge amount of working capital in comparison of the companies who involves in trading goods. Working capital requirements varies on the assets structure of the firms.
The production cycle is also one of the important factors which determine the requirement of total working capital of a firm. The total time involved in the production of a good is known ad production cycle. It is also known as manufacturing cycle. it starts from the purchase of raw materials and finished with the manufacture of final goods. For continuous operation of this cycle, adequate amount of working capital is required.
The total working capital requirements are also depend upon the nature of the business cycle. Below are the two phases which are responsible for the variations in business conditions:
(i) upward phase – In this phase boom conditions prevail
(ii) downward phase - In this phase economic activity is goes down.
In upward phase firms needs more working capital as compared to the downward phase.
Production policy is also a factor which determines the total working capital requirement of a firm. If a firm producing those goods which have high demand in particular season, the production policy is an important determinant of working capital.
CHANGES IN PRICE LEVEL:
If the price level is increase, there is also a requirement of increase working capital as it requires more amount to produce previous quantity of goods.
GROWTH AND EXPANSION:
Growth and expansion of the business required larger amount of working capital. If a firm is growing it also requires increasing its working capital.
AVAILABILITY OF RAW MATERIALS:
If the raw materials are easily available, the firm does not require maintaining huge inventory of raw materials. In this case high amount of working capital are not required. On the other hand if the raw materials are not easily available & scarce and its supply is irregular and seasonal in nature, the firm require huge amount of working capital to store reasonable quantity of such inventories in their hand.
Dividend can be paid in the form of cash so the working capital will be decrease as cash is spent. On the other hand, working capital will increase if a firm does not pay dividend.
Depreciation policy is also a factor which determines the total working requirement of the firm. Depreciation does not involve any cash outflow. Therefore its on working capital is indirect.