Question

As a finance manager, outline any four factors you would consider while determining the working capital needs of the organisation.

Answer 1

Factors affecting the working capital requirement of the organisation are as follows:

1. Nature of Business: Organisations that are involved in manufacturing or production generally require more working capital since they need to have raw materials, work-in-progress, and finished goods on hand. On the other hand, because they don’t have to keep large stocks, public utility companies and service-based enterprises might require less working capital.
2. Size of Business: Larger organisations require greater operating capital than smaller enterprises. Department stores demand greater working capital than hawkers.
3. Operating Cycle: The operating cycle is the time required to convert the raw materials into cash through sales. Longer operating cycles require more working capital to continue operations.
4. Credit Policy: Credit policy describes the terms of credit granted to customers and received from suppliers. It is crucial for determining a firm's working capital needs. Higher working capital is required when customers have liberal credit terms or suppliers have stricter payment terms.