Question

Which of the following statements is correct about factors affecting working capital requirements?

Options

• Higher is the lead time, lower the quantity of material to be stored and higher is the amount of working capital requirement.

• A tight credit policy results in higher amount of debtors, increasing the amount of working capital.

• Working Capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle.

• The working capital requirement of a business becomes lower with higher rate of inflation.

Answer 1

Working Capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle.

Explanation:

1. If it takes more time to get materials (higher lead time), you must store more, so you need more working capital.
2. A strict (tight) credit policy means you sell goods on cash, not credit. So, you have fewer debtors and need less working capital.
3. If your production takes longer (longer processing cycle), your money gets stuck for a longer time, so you need more working capital.
4. When prices increase (inflation), your costs go up, so you need more working capital, not less.