Question

Justify the following statement.

The nature of business affects the working capital requirement.

Answer 1

There are no precise standards to measure working capital adequacy. Management has to determine the size of working capital in light of certain aspects of the business firm and the economic environment within which the firm operates. Firms engaged in manufacturing essential products of daily consumption would need relatively less working capital as there would be constant and sufficient cash inflow in the firm to take care of liabilities. Likewise, public utility concerns have to maintain a small working capital because of a continuous flow of cash from their customers. On the contrary, if the business is dealing in Luxurious products, it requires a huge amount of working capital as the sale of Luxurious items is not frequent. Trading/merchandising firms that are concerned with the distribution of goods have to carry big inventories of goods to meet customers' demands and have to extend credit facilities to attract customers. Hence, they need a large amount of working capital.