KUVEMPU UNIVERSITY

BACHELOR OF COMMERCE
FINANCIAL MANAGEMENT V SEMESTER
CHAPTER 6 WORKING CAPITAL MANAGEMENT
SESSION 62
DETERMINANTS OF WORKING CAPITAL OR FACTORS AFFECTING THE WORKING CAPITAL
REQUIREMENTS:

The working capital requirements of a concern are affected by a number of factors. The
various factors which affect the working capital requirements of a concern are:

1. NATURE OF THE BUSINESS:

The nature of the business affects the working capital requirements of a concern. Example:
public utilities like electricity, water supply and railways need very little working capital as they
offer cash sales only and do not have inventories and receivables. On the other hand, trading
and manufacturing companies require sufficient working capital as they have to invest in
inventory and bills receivables/accounts receivables.
2. SIZE OF BUSINESS OR SCALE OF OPERATIONS:
The working capital requirements of a concern is greatly influenced by the size of its business.
Greater the size of the business, generally longer will be the requirements of working capital.
A concern carrying on activities on small scale needs less working capital.
3. GROWTH AND EXPANSION OF THE BUSINESS:
It also affects the working capital requirements of a concern. When there is growth and
expansion of the business, the firm needs more working capital.
4. LENGTH OF OPERATING CYCLE:
The working capital requirements is directly influenced by the length of operating
cycle/manufacturing. The longer the manufacturing time, greater is the working capital
requirement. Shorter the manufacturing cycle time, shorter is the working capital
requirement.
5. PRODUCTION POLICIES:
The production policies followed by a firm will also affect the working capital requirements.
Capital intensive industry requires more of fixed capital and less working capital. Labour
intensive industries require less fixed capital and more working capital.
6. RATE OF STOCK TURNOVER (the speed of sales):
There is a high degree of correlation (connection) between the rapidity of turnover and the
amount of working capital requirements. Firms having high rate of stock turnover will require
less working capital than a firm having less rate of stock turnover. Example: a vegetable
merchant has high sales turnover and hence needs less working capital than a jewelry shop
which has low sales turnover.
7. SEASONAL FLUCTUATIONS IN DEMAND:
It is also one factor which influences the working capital requirements. Example the demand
for the woolen factory increases during winter and decreases in summer. As a result, its
working capital needs will increase during winter and decrease in summer.
8. BUSINESS CYCLES:
 When the business is prosperous, there is a need for larger amount of working capital due to
increase in sales, rise in prices etc. during the times of depression, the business contracts are
low sales declines, difficulties in collections from debtors the firms may have a large amount
of working capital lying idle.
9. FLUCTUATIONS IN SUPPLIES:
If the raw materials are available only during certain seasons, then it has to be stored in large
quantities to provide for periods when supplies will not be available. Then the working capital
requirements is more.
10. OPERATING EFFICIENCY:
A firm enjoying operating efficiency can reduce wastages and there by the working capital
needs is considerably reduced.
11. CREDIT FACILITIES ENJOYED FROM CREDITORS: A firm enjoying liberal credit facilities from
its suppliers or creditors will need lower working capital.
12. PRICE LEVEL CHANGES:
In the periods of rising prices, a firm has to pay higher prices for the purchases, but cannot
afford to raise the prices of the products, needs more working capital.
13. GOVERNMENT REGULATIONS:
The Tandon committee has prescribed norms for holding inventories and debtors, which a
concern is not expected to exceed. This affects the working capital requirements of the
concern.
14. PROFIT LEVEL:
Higher profit margins result in higher generation of internal funds and contributes more to
the working capital.
15. DIVIDEND POLICY:
The liberal dividend policy will require more working capital than a company which follows
strict dividend policy.
16. TAXES:
If the tax imposed by the government is high, then the company is left out with less profits
with the company and hence working capital requirement is high.
17. DEPRECIATION POLICY:
Higher the depreciation charged by the company reduces the profits available for dividend
and thereby checks the outflow of working capital (cash) in the form of dividend.

SOURCES OF WORKING CAPITAL

1. The sources available for Short Term Financing of working capital are:
 Short Term Loans from Banks (Overdraft, Cash Credit)
 Commercial Papers
 Factoring
 Customer Advances
 Selling Goods on Instalment
2. The sources available for Long Term Financing of working capital are:
 Loans from Financial Institutions
 Debentures
 Public Deposits
 Internal Sources- retained earnings/ploughing back of profits
 Preference Shares
 Equity Shares
3. Spontaneous financing refers to the automatic sources of short term
funds. The major sources of such financing are trade credit (Creditors
and Bills payable) and outstanding expenses. Spontaneous sources of
finances are cost free.