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Business Cycle

The working capital requirements are also determined by the nature of the Business fluctuations lead to cyclical and seasonal changes which, in turn, cause a working capital position, particularly for temporary working capital requirements in business conditions may be in two directions: (i) upward phase when boom, and (ii) downswing phase when the economic activity is marked by a the upswing of business activity, the need for working capital is likely to grow between increased sales and receipt of cash as well as to finance purchases raw material to the expansion of the level of activity. Additional funds may be invest in plant and machinery to meet the increased demand. The downswing business cycle has exactly an opposite effect on the level of working capital requirements decline in the economy is associated with a fall in the volume of sales which, in turn, leads to a fall in the level of inventories and book debts, The need for working capital in recessionary conditions is bound to decline, In brief, business fluctuations influence the size of working capital mainly through the effect on inventories. The response of inventory to business cycles is mild or violent according to nature of the business cycle.

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