Determinants of Working Capital: (or) Factors Determining Working Capital:
The working capital of any firm depends upon the nature of business it has. If it is any public organization like Railways, Electricity Board, etc., these require a very less working capital. On the other hand, if this organization is any manufacturingand trading firm, then it requires a huge amount of working capital to run their organization effectively.
Length of the manufacturing cycle decides the amount of working capital required for the firm. If the manufacturing cycle is less, then the working capital requirement will be less. In other words, if the manufacturing cycle is more, the requirement of working capital will be high. In this context, every organization try to precise their manufacturing cycle to have accurate balance of working capital.
For determining the working capital of an organization, production policies are much important. If the organization is labor-intensive, then it requires minimal working capital. If the organization works on automation, it requires a huge amount of working capital.
If an organization allows continuous credit by its suppliers, it is expected to the postponement of the payment. In this context, the payment out of the sales extends the time interval of goods produced. Thus, it requires a large amount of working capital that will be locked up in bills receivable along with sundry debtors.
A few of the firms purchase raw materials to a great extent. This is totally because of unusual supply of raw materials that are only come from the limited sources. Here, the working capital gets locked up in a huge amount.
Seasonal changes put an impact on the financial stability of the organization. During the periods of inflation and depression, huge amount of working capital is required. In other times, this requirement will be in lesser amount.
A company needs cash for its different purposes. If the requirement of cash of an organization is in greater amount, then it needs greater working capital and vice-versa.
According to the SEBI, the new provisions of dividend policy are declaring the company’s divided to its shareholders is mandatory. This means dividend policy has a great impact on working capital. As per the new provisions, if there is a need of working capital in the organization, it should be met with retained earnings. When this dividend is declared, the company has to pay all in cash. This requires a huge amount of working capital.
Excluding the above points, a few other factors that also put affect the requirement of working capital in an organization. For example, tariff policies of government, lack of transport and communication, etc.