Working capital- Determinants

Working capital refers to that part of firm’s capital that is required to finance current assets of the company such as marketable securities, debtors, inventories and cash. Working capital comprises of funds that is used for wages, salaries and day to day expenses of the enterprise.
Working capital holds a very important place in the enterprise and must be planned carefully and strategically so to avoid unnecessary outlay of funds and simultaneously optimize profits.



Nature of the business
Financial firms and trading firms requires less working capital as funds are not tied to inventories. Whereas manufacturing concerns need large working capital to finance inventories to carry out the production cycle smoothly.

Scale of Business
Working capital is also determined by the scale of business and its turnover. Small scale business requires very less working capital when compared to the large scale businesses and Giant concerns. One has to determine such activities of the concern before making provisions for the working capital requirements.
Production Policy
Production depends on various factors like seasonal fluctuations, availability of raw materials etc. If production carries out continuously throughout the year then it would demand high working capital. Whereas in business where production is carried out seasonally, less working capital is tied up.

Rate of Stock turnover
High rolling stocks helps in realization of sales money whereby reducing the additional requirement of working capital. Dead Stocks and low turnover results in large sum of funds to get tied up.

Working capital cycle
It is the cycle that begins from purchase of raw materials to realization of cash after sales. It includes phases like work in progress, finished goods and sales of finished goods. The larger the cycle more would be working capital needs.


Credit Policy
It is often defined as terms of sales and purchase. An enterprise purchasing raw materials in cash and selling out finished goods on credit will require more working capital when compared to enterprise purchasing raw materials on credit and finished goods in cash.
Length of credit also has a substantial bearing over working capital requirements.

Synchronizing and correlating such factors and estimating their trade offs have helped large organization to grow as giants.