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Determinants of Working Capital : (or) Factors Determining Working Capital

(i)                 Nature of Business

(ii)               Production Policies

(iii)             Length of the Manufacturing Cycle

(iv)             Terms of Purchases and Sales

(v)               Seasonal Variation

(vi)             Fluctuations in Supply

(vii)           Dividend Policy

(viii)         Requirements of Cash.

(ix)             Other Factors.

 

(i)                 Nature of Business. Working capital of the organisation basically depends upon the nature of business. Public utility concerns like Railways, Electricity etc would need only very little amount of working capital. On the other hand, manufacturing and trading concerns need huge amount of working capital in their operations.

 

(ii)               Production Policies. Production policy of the organisation is also an important factor for determining working capital. In case of labour intensive industry the quantum of working capital is required only in smaller amount. But highly automatic plants require huge amount of working capital.

 

(iii)             Length of the Manufacturing Cycle. The amount of working capital needed is highly influenced by the length of manufacturing cycle. If the manufacturing process is long, huge amount of working capital will be required and vice versa.   so utmost care should be taken to shorten the period of cycle in order to minimize the working capital requirements.

 

(iv)             Terms of Purchase and Sales. If an organisation provides liberal credit facilities to its customers, large amount of working capital gets locked up in sundry debtors and bills receivable. And at the same time if continuous credit is allowed by the suppliers, it tends to cause not only postponement of payment but also payment out of sale proceeds of the goods produced. The period of credit allowed and received also determines the working capital requirements of the company.

 

(v)               Seasonal Variations. Seasonal changes in the economy also affect the quantum of working capital. Huge amount of working capital is required during the periods of inflation and depression and the requirement declines during the other periods of economic cycle.

 

(vi)             Fluctuations in Supply. Certain industries purchase raw material at huge level due to their irregular supply throughout the year. It is specifically applicable to the manufacturing organisation which requires an unusual type of raw material that can be purchased only with limited sources.

 

(vii)           Dividend Policy. According to the new provisions of the SEBI, all the companies are compulsorily to declare the dividend to the shareholders. So the dividend policy has a dominant influence on the working capital position of the organisation. As per the new provisions, need for the working capital is met with retained earnings. Once dividend is declared and the same has to be paid in cash requires large amounts from the pool of working capital.

 

(viii)         Requirements of Cash. Need for the working capital depends upon the amount of cash required by the company for its various purposes. If greater the requirements of cash, the higher will be the working capital needs of the company and vice versa.

 

(ix)             Other Factors. Apart from the above points, some other factors also affect the working capital requirements. For example, lack of transport and communication facilities, tariff policies of government etc. also influence the requirements of working capital.