Credit Policy

Credit Policy The credit policy relating to sales and purchases also affects, the working capital. The credit policy influences the requirement of working capital in two ways: (i) through credit terms granted by the firm to its customers buyers of goods; (ii) credit terms available to the firm from its creditors. The credit terms granted to customers have a hearing on the magnitude of working capital by determin

Production Policy

Production Policy The quantum of working capital is also determined by production policy. In case of certain lines of business, the demand for products is seasonal, that is, they are purchased during certain months of the year. What kind of production policy should be followed in such cases: There are two option, open to such enterprises: either their production only to periods when goods are purchased or they

Business Cycle

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

Production Cycle

Production Cycle Another factor which has a bearing on the quantum of working capital is the production term production or manufacturing cycle refers to the time involved in the manufacture of goods. It covers the time span between the procurement of raw materials and the complete manufacturing process leading to the production of finished goods. Funds have to be during the process of manufacture, necessitating

General Nature of Business

General Nature of Business The working capital requirements of an enterprise are basically related to the conduct of business. Enterprises fall into some broad categories depending on the nature of their business. For instance public utilities have certain features which have a bearing on their working capital needs. The relevant features are: (i) the cash nature of business, that is, cash sale, and (ii) sale of


DETERMINANTS OF WORKING CAPITAL A firm should plan its operations in such a way that it should have neither too much nor too little working capital. The total working capital requirement is determined. by a wide variety of factors. These factors, however, affect different enterprises differently. They also vary from time to time. In general, the following factors are involved in a proper assessment of the quantu

Policy Changes

Policy Changes The second major cause of changes in the level of working capital is because of policy changes initiated by the management. There is a wide choice in the matter of current assets policy. The term current asset policy may be defined as the relationship between current assets and sales volume. A firm following a conservative policy in this respect having a very high level of current assets in rel

Changes in Working Capital

Changes in Working Capital The changes in the level of working capital occur for the following three basic reasons: (i) changes in the level of sales and or operating expenses, (ii) policy changes, and (iii) changes in technology. Changes in Sales and Operating Expenses The first factor causing a change in the working capital requirement is a change in the sales and operating expenses. The changes in this factor

Permanent and Temporary Working Capital

Permanent and Temporary Working Capital The operating cycle, thus, creates the need for current assets (working capital). However, they does not come to an end after the cycle is completed. It continues to exist. To explain this computing need of current assets, a distinction should be drawn between permanent and the working capital. Any amount over and above the permanent level of working capital is temporary, o


NEED FOR WORKING CAPITAL The need for working capital (gross) or current assets cannot be overemphasized. Given the objective of financial decision making to maximize the shareholders wealth, it is necessary to generate sufficient profits. The extent to which profits can be earned will naturally depend, among other things, upon the magnitude of the sales. A successful sales programmed is, in other words, necess