Price Level Changes

Changes in the price level also affect the requirements of working capital. Rising prices the use of more funds for maintaining an existing level or activity. For the same level of current assets, higher cash outlays are required. The effect of rising prices is that a higher amount of working capital is needed. However, in the case of companies which can raise their prices proportionately, there is no serious problem working capital. Moreover, the price rise does not have a uniform effect on all contradiction. It is likely that some firms may not be effectual at all. In brief, the implications of changing price level on working capital position vary from company to company depending on the nature of its situations, its standing in the market and other relevant considerations.

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