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. Risk here refers to technical insolvency while returns refer to increased profits/ earnings. The amount of working capital is determined by a wide variety of factors.
1. Nature of the business
2. Size of the business
3. Length of period of manufacture
4. Methods of purchase and sale of commodities
5. Converting working assets into cash
6. Seasonal variation in business
7. Risk in business
8. Size of labor force
9. Price level changes
10. Rate of turnover
11. State of business activity
12. Business policy