{"id":6512,"date":"2021-09-19T17:07:58","date_gmt":"2021-09-19T11:37:58","guid":{"rendered":"https:\/\/scholarsclasses.com\/blog\/?p=6512"},"modified":"2025-10-07T20:09:54","modified_gmt":"2025-10-07T14:39:54","slug":"factors-affecting-working-capital","status":"publish","type":"post","link":"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/","title":{"rendered":"10 Factors Affecting Working capital &#8211; Scholarszilla"},"content":{"rendered":"\n<figure class=\"wp-block-image size-large is-resized\"><img decoding=\"async\" width=\"1024\" height=\"576\" data-src=\"https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Factors-Affecting-Working-Capital-1024x576.jpg\" alt=\"Factors Affecting Working Capital\" class=\"wp-image-6519 lazyload\" style=\"--smush-placeholder-width: 1024px; --smush-placeholder-aspect-ratio: 1024\/576;width:768px;height:432px\" title=\"\" data-srcset=\"https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Factors-Affecting-Working-Capital-1024x576.jpg 1024w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Factors-Affecting-Working-Capital-300x169.jpg 300w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Factors-Affecting-Working-Capital-768x432.jpg 768w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Factors-Affecting-Working-Capital-1536x864.jpg 1536w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Factors-Affecting-Working-Capital-640x360.jpg 640w, https:\/\/scholarsclasses.com\/blog\/wp-content\/uploads\/2021\/09\/Factors-Affecting-Working-Capital.jpg 1920w\" data-sizes=\"(max-width: 1024px) 100vw, 1024px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" \/><\/figure>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-69eae41b93572\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-69eae41b93572\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/#Factors_Affecting_Working_Capital\" >Factors Affecting Working Capital<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/#Factors_Affecting_Working_Capital_Requirement\" >Factors Affecting Working Capital Requirement<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/#1_Nature_of_business\" >1) Nature of business<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/#2_Size_of_business\" >2) Size of business<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/#3_Volume_of_sales\" >3) Volume of sales<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/#4_Production_cycle\" >4) Production cycle<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/#5_Business_cycle\" >5) Business cycle<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/#6_Terms_of_purchases_and_sales\" >6) Terms of purchases and sales<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/#7_Credit_control\" >7) Credit control<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/#8_Growth_and_Expansion\" >8) Growth and Expansion<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/#9_Management_ability\" >9) Management ability<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/scholarsclasses.com\/blog\/factors-affecting-working-capital\/#10_External_factors\" >10) External factors<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading has-text-align-center\"><span class=\"ez-toc-section\" id=\"Factors_Affecting_Working_Capital\"><\/span><strong>Factors Affecting <strong><strong>Working Capital<\/strong><\/strong><\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-pullquote\"><blockquote><p><strong><strong><em>Working capital is the capital which is used to carry out the day to day business activities.<\/em><\/strong><\/strong><\/p><\/blockquote><\/figure>\n\n\n\n<p><strong>A business firm will have to arrange capital for the following<br><\/strong>a) For building up inventories<br>b) For financing receivables<br>c) For covering day-to-day operating expenses.<\/p>\n\n\n\n<p>The capital invested in these assets is referred to as \u2018<strong><a href=\"https:\/\/en.wikipedia.org\/wiki\/Working_capital\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/en.wikipedia.org\/wiki\/Working_capital\" rel=\"noreferrer noopener\">Working capital<\/a><\/strong>\u2019. The concept of <a href=\"https:\/\/scholarsclasses.com\/blog\/meaning-of-working-capital\/\" target=\"_blank\" data-type=\"URL\" data-id=\"https:\/\/scholarsclasses.com\/blog\/meaning-of-working-capital\/\" rel=\"noreferrer noopener\">working capital<\/a> is viewed differently by leading authorities. Some authorities consider working capital as equivalent to excess of current assets over current liabilities. <\/p>\n\n\n\n<p><strong><em>Gerstenbergh<\/em><\/strong> defines it as, \u2018\u2018<strong>The excess of current assets over current liabilities.<\/strong>\u2019\u2019 This approach refers to \u2018Net Working Capital\u2019. Gerstenbergh does not call it working capital. He prefers to call it \u2018circulating capital\u2019.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Factors_Affecting_Working_Capital_Requirement\"><\/span><strong>Factors Affecting Working Capital Requirement<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"1_Nature_of_business\"><\/span><strong>1) Nature of business<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Firms engaged in manufacturing essential products of daily consumption would need relatively less working capital as there would be constant and sufficient cash inflow in the firm to take care of liabilities. Likewise, public utility concerns have to maintain small working capital because of continuous flow of cash from their customers.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"2_Size_of_business\"><\/span><strong>2) Size of business<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The size of business also affects the requirement of working capital. A firm with large scale operations will require more working capital.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"3_Volume_of_sales\"><\/span><strong>3) Volume of sales<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>This is the most important factor affecting size of working capital. The volume of sales and size of working capital are directly related with each other. If volume of sales increases, there is an increase in the amount of working capital and vice a versa.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"4_Production_cycle\"><\/span><strong>4) Production cycle<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The process of converting raw material into finished goods is called the production cycle. If the period of production cycle is longer, then firm needs more amount of working capital. If the manufacturing cycle is short, it requires less working capital.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"5_Business_cycle\"><\/span><strong>5) Business cycle<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>When there is a boom in the economy, sales will increase. This will lead to an increase in investment in stocks. This requires additional working capital. During recession, sales will decline and hence the need of working capital will also decline.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"6_Terms_of_purchases_and_sales\"><\/span><strong>6) Terms of purchases and sales<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>If the firm does not get a credit facility for purchases but adopts a liberal credit policy for its sales, then it requires more working capital. On the other hand, if credit terms of purchases are favorable and terms of credit sales are less liberal, then the requirement of cash will be less. Thus working capital requirements will be reduced.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"7_Credit_control\"><\/span><strong>7) Credit control<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Credit control includes the factors such as volume of credit sales, the terms of credit sales, the collection policy, etc. If a credit control policy is sound, it is possible for the company to improve its cash flow. If credit policy is liberal, it creates a problem of collection of funds. It can increase the possibility of bad debts. Therefore a firm requires more working capital. The firm making cash sales requires less working capital.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"8_Growth_and_Expansion\"><\/span><strong>8) Growth and Expansion<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The working capital requirement of a firm will increase with the growth of the firm. A growing company needs funds continuously to support large-scale operations.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"9_Management_ability\"><\/span><strong>9) Management ability<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>The requirement of working capital is reduced if there is proper coordination between production and distribution of goods. A firm stocking on heavy inventory calls for higher level for working capital.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"10_External_factors\"><\/span><strong>10) External factors<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>If financial institutions and banks provide funds to the firm as and when required, the need for working capital is reduced.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#46;&#46;&#46;<\/p>\n","protected":false},"author":1,"featured_media":6519,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[1],"tags":[2568],"class_list":["post-6512","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-misc","tag-factors-affecting-working-capital"],"_links":{"self":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts\/6512","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/comments?post=6512"}],"version-history":[{"count":6,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts\/6512\/revisions"}],"predecessor-version":[{"id":39342,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/posts\/6512\/revisions\/39342"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/media\/6519"}],"wp:attachment":[{"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/media?parent=6512"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/categories?post=6512"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/scholarsclasses.com\/blog\/wp-json\/wp\/v2\/tags?post=6512"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}