Puja_Deshmukh_999 Factors affecting Working Capital 1) Nature of the Business:- ‘The working capital requirement is highly influenced by nature of business. The type of business, firm is involved in, is the next consideration while deciding the working capital. In case of trading concem 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. 2) Size of the Business/Scale of Operation: - Another important factor is the size of the business or the 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. Therefore, the size of an organization is one of the major determinants of working capital, 3) 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. 4) Seasonal Demand/Seasonal Factors: Some goods are demanded throughout the year while others have seasonal demand. Goods which have uniform demand the whole year their production and sale are ‘continuous. Consequently, such enterprises need little working capital. On the other hand, some goods have seasonal demand but the same are produced almost the whole year so that their supply is available readily when demanded. Such enterprises have to maintain large stocks of raw material and finished products and so they need large amount of working capital for this purpose. Woolen mills are a good. example of it, 5) Turnover of Working Capital:- Working Capital Requirement is also influenced by the turnover of working capital. If the tumover is high, the requirement of working capital is low. On the other hand, if the tumover is low, the requirement of working capital is high. Turnover of working is equal to cost of goods sold/Working Capital.6) Level of taxes:- If tax rates are increased, more working capital will be required as taxes have to be paid in advance. 7) Credit Allowed:- Those enterprises which sell goods on cash payment basis need little working capital but those who provide credit facilities to the customers need more working capital 8) Credit Availed:- If raw material and other inputs are easily available on credit, less working capital is needed. On the contrary, if these things are not available on credit then to make cash payment quickly large amount of working capital will be needed. 9) Growth Prospects/Growth and Expansion:~ Growth means the development of the scale of business operations (production, sales, etc.). The organizations which have sufficient possibilities of growth require more working capital, while the case is different in respect of companies with less growth prospects. 10) Inflation/Changes in Price:- Inflation means rise in prices. In such a situation more capital is required than before in order to maintain the previous scale of production and sales. Therefore, with the increasing rate of inflation, there is a corresponding increase in the working capital. 11) Operating Efficiency:- Operating efficiency means efficiently completing the various business operations. Operating efficiency of every organization happens to be different. If the company can make use of the assets at a maximum utilization with reduced wastage, the requirement of working capital is reduced. Some such examples are: «Converting raw material into finished goods at the earliest, ‘© Selling the finished goods quickly, and * Quickly getting payments from the debtors ‘A company which has a better operating efficiency has to invest less in stock and the debtors. Therefore, it requires less working capital, while the case is different in respect of companies with less operating efficiency. 12) Level of Competition: High level of competition increases the need for more working capital. In order to face competition, more stock is required for quick delivery and credit facility for a long period has to be made available.Puja_Deshmukh_999 Working Capital Meaning of Working Capital The Capital of a business which is used in its day to day trading Operations, Calculated as theCurrent assets minus the current Liabilities. Definition of Working Capital Working capital in layman’s language of the business. It is excess of current assets over current liabilities. According to Mead, Baker and Malott, “Working capital means current assets”. According to J.S. Mill, “The sum of the current assets is the working capital of the business”. n be described as funds required for day to day running ‘Types of Working Capital 1. Gross Working Capital Gross Working Capital means total Current Assets without deducting the Current Lik .. Gross Working capital is equal to the “Total current assets” only. Items of Current assets are like stock of raw material, WIP, finished goods, Sundry Debtors, bills receivable, cash and bank balance, Prepaid Expenses, Accrued Income, Advance payment, Short term Investment, etc. 2, Net Working Capital Net Working capital is the Excess of current assets over current liabilities. Net Working Capital is also known as “Net current Assets” Net Working Capital Gross working Capital — Current OR Net Working Capital = Current Assets ~ Current Liabi 3. Positive Working Capital / ‘When the Current assets are more than the Current Liabilities such a situation is known as “Positive Working Capital”. Positive Working Capital indicates favorable liquidity and solvency position of a concern. [Positive Working Capital = Current Assets > Current Liabilities 4. Negative Working Capital a When the Current liabilities are more than the Current Assets such a situation is known as “Negative Working Capital”. Negative Working Capital Indicates Lack of Liquidity an adverse solvency position of a concern.