Question

Explain the following as factor affecting the requirements of working capital:

Availability of raw material

Explain how the following factor affects the working capital requirement of a business:

Availability of raw material 

Answer 1

A firm does not have a huge stock of inventories of raw material if the raw materials are easily available for them. Therefore, the amount of working capital required will be less in this situation. On the other hand, if the raw materials are not easily available or their supply is not smooth, then the company must maintain a huge stock of raw material to ensure uninterrupted operations, thereby requiring a large working capital.

Difficult to obtain raw material ⇒ High working capital
Easy to obtain raw material ⇒ Low working capital

The availability of raw materials affects working capital requirements in the following ways:

1. Lead Times: Due to longer lead times for raw material purchase, higher inventory levels are necessary to prevent supply chain disruptions. To ensure uninterrupted production, companies may need to keep bigger stocks of raw materials, which may increase their working capital needs.
2. Supplier Relationships: Safeguard against raw material shortages and improve payment conditions with trusted suppliers. Secure and efficient supply chains enable companies to optimize inventory levels and secure favorable pricing and payment conditions, improving working capital management.