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9 Determinants of Working Capital of a Company| Financial Management

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❶Length of period of manufacture 3. This also affects the size of working capital.

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Use of Manual Labour or Mechanisation 6. Need to keep large stocks of raw materials of finished goods 7. Turnover of working capital 8. Terms of Credit 9. Requirements of Cash and The requirements of working capital are not uniform in all enterprises, and therefore, factors responsible for a particular size of working capital in one company are different than in other enterprise.

Therefore, a set pattern of factors determining the optimum size of working capital is difficult to suggest. It is an important factor for determining the amount of working capital needed by various companies. The trading or manufacturing concerns will require more amount of working capital along-with their fixed investment of stock, raw materials and finished products.

Public utilities and railway companies with huge fixed investment usually have the lowest needs for current assets, partly because of cash, nature of their business and partly due to their selling a service instead of a commodity. The average length of the period of manufacture, i.

If it takes less time to make the finished product, the working capital required will be less. To give an example, a baker requires one night time to bake his daily quota of bread. Between these two cases may fall other business concerns with varying periods of manufacture requiring different amounts of working capital.

Generally, the size of the company has a direct relation with the working capital needs. Big concerns have to keep higher working capital for investment in current assets and for paying current liabilities. Where the cost of raw materials to be used in manufacturing of a product is very large in proportion to the total cost and its final value, working capital required will also be more.

That is why, in a cotton textile mill or in a sugar mill, huge funds are required for this purpose. A building contractor also needs huge working capital for this reason. If capital intensive, high-technology automated system is adopted for production, more investment in fixed assets and less investment in current assets are involved. Also, the conversion time is likely to be lower, resulting in further drop in the level of working capital.

On the other hand, if labor intensive technology is adopted, less investment in fixed assets and more investment in current assets which would lead to higher requirement of working capital. Growth and expansion industries need more working capital than those that are static. Apart from the above factors, dividend policy, depreciation policy, price level changes, operating efficiency and government regulations also influence the level and the size of working capital.

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Other topics under Working Capital Management: Click for More Uploads. Generally speaking, trading and financial firms require relatively large amounts of working capital, public utilities comparatively small amounts, whereas manufacturing concerns stand between these two extremes, their needs depending upon the character of industry of which they are a part. Depending upon the kind of items manufactured, a company is able to offset the effect off- seasonal fluctuations upon working capital by adjusting its production schedules.

The choice rests between varying output in order to adjust inventories to seasonal requirements and maintaining a steady rate of production and permitting stocks of inventories to build up during off-season periods. It will thus be obvious that a level production plan would involve a higher investment in working capital.

If the manufacturing process in an industry entails a longer period because of its complex character, more working capital is required to finance that process. The longer it takes to make an approach and the greater its cost, the larger the Inventory tied up In Its manufacture and, therefore, higher the amount of working capital.

The speed with which the circulating capital completes its round I. Inventory of finished goods into book debts or accounts receivables and book debt into cash account, plays an Important and decisive role in judging the adequacy of working capital.

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Some of the most determinants of working capital are: 1. Nature of business 2. Length of period of manufacture 3. Volume of business 4. The proportion of the cost of raw materials to total cost 5. Use of Manual Labour or Mechanisation 6. Need to keep large stocks of raw materials of finished goods 7.

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Some of the major determinants of working capital are discussed below: A company, as a general policy, wants to hold in balance as small a quantity of working capital as possible so long as undue solvency risks are not imposed on it. This is a logical approach indicating that working capital is a.

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In analyzing the determinants of working capital management, Chiou and Cheng (), found that there is an inverse relationship between capital structure of the firm and the two measures of liquidity: net liquid balance and working capital ratio. The determinants of working capital are items that have a direct impact on the amount invested in current assets and current liabilities. Managers like to keep a close watch over these factors, since working capital can absorb a large part of the funding that an organization has at its disposal.

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capital and short-term financing are referred to as working capital management (Nimalathason, ). It is the regulation, adjustment and control of the balance of current assets and current. Please do send us a request for Determinants of Working Capital tutoring and experience the quality yourself. Other topics under Working Capital Management: Aim of Working Capital Management.