Factors Determining the working capital

Following are the important determinants of the working capital:

1. Nature Of Business:
It is the first determinant of working capital that it is affected with the nature of business. Business may be small or large. In small business,company need high working capital because, small business is relating to trading of goods,for starting small business,you need very small fixed capital but need high working capital for paying day to day expenses. But in large business,we require more fixed capital than working capital for purchasing fixed asset.

2. Nature of Demand:

Nature of demand also absolutely affects the working capital need.Some product can easily sold by businessman,in that business;you need small amount of working capital because your earned money from sale can easy fulfill the shortage of working capital. But,if demand is very less,it is required that you have to invest large amount of working capital because your all fixed expenses must be paid by you. For paying fixed capital you need working capital.

3. Production Policy:

Different company may different production policy. Some companies stop or decrease the production level in off seasons,in that time,company may also reduce the number of employees or decrease the purchasing of new raw materials, so, it will certainly decrease the amount of working capital but on the side,some company may continue their productions in off seasons, in that case,they need definitely large amount of working capital.

4. Credit Policy:

Credit policy is relating to purchasing and selling of goods on credit basis. If companies have to purchase large amount of raw materials for their productions they need to managing large amount of working capital.

5. Dividend Policy:

Company can distribute major part of net profit. But, if there is no reserve, we have to invest large large amount in working capital because,lacking of reserve will affect on adversely on fulfill our liabilities. In that case,we have to yield working capital by taking short term loan for paying uncertain liability.

6.Working Capital Cycle:
When the working capital cycle of a firm is long, it will require larger amount of working capital. But, if working capital cycle is short, it will need less working capital.

7. Manufacturing Cycle:

Manufacturing cycle refers to the time-span between the purchase of raw- materials and their conversion into finished goods by means of manufacturing process. Funds remain tied up in semi-finished goods during the manufacturing process.

Longer the manufacturing cycle the larger the working capital needed and vice versa. For example, a distillery requires heavy investment in inventories because it has an ageing process. On the other hand, in a bakery, raw materials are soon . converted into finished goods and not much funds are looked up inventories.

8. Business Cycles:

There are two main part of business cycle,one is boom and other is recession. In boom,we need high money or working capital for development of business but in recession, we need only low amount of working capital.

9. Price level change:

If there is increasing trend of products,we need to store high amount of working capital,because next time,it is precisely that we have to pay more for purchasing raw materials or other service expenses. Inflation and deflation are two major factors which decide the next level of working capital in business.

10. Effect of external business environment:

There are many external business environmental factors which affect the need of working capital like fiscal policy,monetary policy and bank policies and facilities.