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    Financial Management: Assignment

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    Siddhant gudwani
    The key factors that determine a firm's working capital needs are: [1] the length of its operating cycle; [2] its industry and nature of business; and [3] its scale of operations. Longer operating cycles, businesses that sell on credit, and larger scale operations all require more working capital. Other important factors include business cycles, seasonality, production methods, credit policies, supplier terms, operational efficiency, and raw material availability.

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    Financial Management: Assignment

    Uploaded by

    Siddhant gudwani
    77 views4 pages
    The key factors that determine a firm's working capital needs are: [1] the length of its operating cycle; [2] its industry and nature of business; and [3] its scale of operations. Longer operating cycles, businesses that sell on credit, and larger scale operations all require more working capital. Other important factors include business cycles, seasonality, production methods, credit policies, supplier terms, operational efficiency, and raw material availability.

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    The key factors that determine a firm's working capital needs are: [1] the length of its operating cycle; [2] its industry and nature of business; and [3] its scale of operations. Longer operating cycles, businesses that sell on credit, and larger scale operations all require more working capital. Other important factors include business cycles, seasonality, production methods, credit policies, supplier terms, operational efficiency, and raw material availability.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    77 views4 pages

    Financial Management: Assignment

    Uploaded by

    Siddhant gudwani
    The key factors that determine a firm's working capital needs are: [1] the length of its operating cycle; [2] its industry and nature of business; and [3] its scale of operations. Longer operating cycles, businesses that sell on credit, and larger scale operations all require more working capital. Other important factors include business cycles, seasonality, production methods, credit policies, supplier terms, operational efficiency, and raw material availability.

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    of 4

    FINANCIAL

    MANAGEMENT
    ASSIGNMENT

    Submitted by: Sakshi Sharma


    BBA (G) 4th C
    08414901718
    Q. Discuss the factors that determine the working capital
    of the firm.

    ANS.

     Finance manager must estimate right amount of working


    capital. The finance manager must keep in mind following
    factors before estimating the amount of working capital.

    1. Length of Operating Cycle:

    The amount of working capital directly depends upon the


    length of operating cycle. Operating cycle refers to the time
    period involved in production. It starts right from acquisition of
    raw material and ends till payment is received after sale.

    The working capital is very important for the smooth flow of


    operating cycle. If operating cycle is long then more working
    capital is required whereas for companies having short
    operating cycle, the working capital requirement is less.

    2. Nature of Business:

    The type of business, firm is involved in, is the next


    consideration while deciding the working capital. In case of
    trading concern or retail shop the requirement of working
    capital is less because length of operating cycle is small.

    The wholesalers as compared to retail shop require more


    working capital as they have to maintain large stock and
    generally sell goods on credit which increases the length of
    operating cycle. The manufacturing company requires huge
    amount of working capital because they have to convert raw
    material into finished goods, sell on credit, maintain the
    inventory of raw material as well as finished goods.

    3. Scale of Operation:

    The firms operating at large scale need to maintain more


    inventory, debtors, etc. So they generally require large working
    capital whereas firms operating at small scale require less
    working capital.

    4. Business Cycle Fluctuation:

    During boom period the market is flourishing so more demand,


    more production, more stock, and more debtors which mean
    more amount of working capital is required. Whereas during
    depression period low demand less inventories to be
    maintained, less debtors, so less working capital will be
    required.

    5. Seasonal Factors:

    The working capital requirement is constant for the companies


    which are selling goods throughout the season whereas the
    companies which are selling seasonal goods require huge
    amount during season as more demand, more stock has to be
    maintained and fast supply is needed whereas during off
    season or slack season demand is very low so less working
    capital is needed.

    6. Technology and Production Cycle:

    If a company is using labour intensive technique of production


    then more working capital is required because company needs
    to maintain enough cash flow for making payments to labour
    whereas if company is using machine-intensive technique of
    production then less working capital is required because
    investment in machinery is fixed capital requirement and there
    will be less operative

    7. Credit Allowed:
    Credit policy refers to average period for collection of sale
    proceeds. It depends on number of factors such as
    creditworthiness, of clients, industry norms etc. If company is
    following liberal credit policy then it will require more working
    capital whereas if company is following strict or short term
    credit policy, then it can manage with less working capital also.

    8. Credit Avail:

    Another factor related to credit policy is how much and for how
    long period company is getting credit from its suppliers. If
    suppliers of raw materials are giving long term credit then
    company can manage with less amount of working capital
    whereas, if suppliers are giving only short period credit then
    company will require more working capital to make payments
    to creditors.

    9. Operating Efficiency:

    The firm having high degree of operating efficiency requires


    less amount of working capital as compared to firm having low
    degree of efficiency which requires more working capital.

    Firms with high degree of efficiency have low wastage and can
    manage with low level of inventory also and during operating
    cycle also these firms bear less expense so they can manage
    with less working capital also.

    10. Availability of Raw Materials:

    If raw materials are easily available and there is ready supply


    of raw materials and inputs then firms can manage with less
    amount of working capital also as they need not maintain any
    stock of raw materials or they can manage with very less stock.

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