A firm should have neither low nor high working capital. Low working capital involves more risk and more returns, high working capital involves less risk and less returns.
A
firm should plan itd operation in such a way that is shoult have neither too much nor
too little working capotal. The total working capital requirement is determined by a wide variety of factors.these factors,however,affect different
enterprise differently. Following are the important factors generally influencing the orking capital requirements:
1. Nature of
the business –the
nature of business
and the working capital
requirement of a business are interlinked. A manufacturing enterprise has a long
operating cycle than that of an operating cycle of a service enterprise. An enterprise involved in production would require more working capital than a
service sector enterprise.
2. Size of the business –the requirement of working capital fluctuates
for seasonal business. The working capital needs
of such business may increase
considerably during peak season and decrease during off season.
3. Manufacturing cycle-the manufacturing cycle starts
with the input of raw materials and ends with finished products. If
the
cycle involves a linger
period,
the
need for working capital would be more and vice-versa.
4. Availability of raw materials.
5. Market condition
6. Business/production policy
7. Methods of purchase and sale of commodities
8. Converting working assets into cash
9. Seasonal variation in business
10. Risk in business
11. Size of
labor
force
12. Price level changes
13. Rate of turnover
14. State of business activity