Financial Management Assignment: Roll No. 30

Financial
Management
Assignment
Roll No. 30
M.Com (Part-I)
Working Capital
Definition: Working capital is defined as excess of current assets over current
liabilities. Working capital measures how much in liquid assets a company has
available to build its business. The number can be positive or negative, depending
on how much debt the company is carrying. In general, companies that have
a lot of working capital will be more successful since they can expand and improve
their operations. Companies with negative working capital may lack
the funds necessary for growth, also called net current assets or current capital.
FACTORS INFLUENCING/DETERMINING WORKING CAPITAL:

The working capital needs of affirm are influenced by numerous factors. The
important ones are:
I. Production Policy: Working capital requirement depends upon the production,

policies of a business unit. Production schedules are adjusted to market deliveries
or stock of inventories is built up during off-seasons periods. Both will entail
higher investment in working capital either to hold the stocks of raw materials or
to hold the stock of finished goods.
II. Nature of Business: The working capital requirement of a firm is closely related
to the nature of its business. A service firm, like an electricity undertaking which
has a short operating cycle, which sells predominantly on cash basis, has a modest
working capital requirement. On the other hand, a manufacturing concern like a
machine tools unit, which has a long operating cycle and which sells largely on
credit, has a very substantial working capital requirement.
III. Length of Manufacturing process: The time that elapses from the purchase
and use of raw materials to the production of finished goods is called
manufacturing cycle. The longer the period a manufacturing cycle takes, the
larger is the amount of working capital required, because the funds get
locked up in production process for a longer period of time.
It is in view of this that, when alternative methods of production

are available, the method with the shortest manufacturing cycle
should be chosen (assuming other factors to be equal). Once a
choice is made, care is taken to see that the manufacturing cycle
is completed within a specified period. Any delay in production is
bound to increase the requirement of working capital.
IV. Credit Policy:In the present-day circumstances, almost all units have to sell goods
on credit. The nature of credit policy is an important consideration in deciding the
amount of working capital requirement. The larger the volume of credit sales, the
greater will be the requirement of working capital. Also, the longer the period the
collection of payment takes, the greater will be the requirement of working capital.
Generally, the credit policy of an individual firm depends on the norms of the
industry to which the firm belongs. Yet it is possible to pursue different credit
policies for different customers in accordance with their creditworthiness. To ignore
creditworthiness of the individual customers can be dangerous to the firm. In
addition, it is necessary that the firm should be prompt in collection of payments.
Any slackness in this respect will increase the requirement of working capital and
will increase the chance of bad debts.
V. SEASONAL FLUCTUATION: Firms which have marked seasonality in their

operations usually have highly fluctuating working capital requirement .To
illustrate, consider a firm manufacturing ceiling fans the sale of ceiling fans
reaches a peak during the summer months and drops sharply during the winter
period.
VI. Fluctuation in supply:The inventory of raw materials spares and stores depends
on the condition of supply. If the supply is prompt and adequate, the firm can
manage with the small inventory.
VII. Fluctuation in Turnover:The speed at which the circulating capital completes its
round plays an important role judging the adequacy of working capital. If the sales or
turnover is quick, limited working capital is adequate. Thus, the faster the sales, lesser
will be the working capital requirement and vice versa. The cash requirement also
determines the amount of working capital. If more cash is needed for meeting the regular
needs the amount of working capital needed will be more. A credit commanding
company will need less working capital.

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FACTORS INFLUENCING/DETERMINING WORKING CAPITAL:

I. Production Policy: Working capital requirement depends upon the production,

It is in view of this that, when alternative methods of production

V. SEASONAL FLUCTUATION: Firms which have marked seasonality in their

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