Determinants of Working Capital: Explained In Detail

Working capital is the combination of cash available and due from suppliers. There are a number of variables that affect an organization’s entire working capital investment.

The determinants of working capital are as given below:

Nature and Size of Business

Working capital is required in all types of enterprises, although the quantity needed varies depending on the type and size of business. Working capital requirements are greater for manufacturing firms than for trading companies.

Position of Business Cycle

Working capital needs will be higher during economic booms than they will be during lean periods. Working capital may be defined as “the money needed to run the business, including cash on hand and outstanding invoices.” The volume of working capital is inextricably linked with the quantity of production.

Production Policy

Working capital requirements are greater in the case of a long production process, as opposed to a shorter one.

Market Conditions

If there is a lot of competition in the market, large stocks are required to sell items. As a result, it necessitates a lot of working capital.

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Seasonal Business

Working capital demands of a company during the production season will be higher in the case of a seasonal business.

Dividend Policy

Dividends have a direct influence on working capital. Payments of dividends result in cash outflow, but retained earnings provide working capital.

Credit Policy

It is important to remember that the longer a firm has been in operation, the more money it will have spent on purchases. This implies that if a company’s credit period is shorter.

Tax Level

Additionally, the level of tax and advance tax provisions has an effect on working capital requirements.