Question

Miracle Ltd. deals in the sale of stationery and office furniture. They source the finished products from reputed brands who give them four to six months credit. Because of increase in the demand for electronic items, they are planning to sell these items also. For this, they have decided to join hands with a Japanese electronic goods manufacturer, to open sales outlets throughout India. State any three factors affecting working capital requirement of Miracle Ltd. other than the factors discussed above.

Answer 1

Factors which affect the requirements of working capital are: 
(i) Business cycle as in case of boom, larger working capital is required as the sales and production are more.
(ii) Seasonal factors as peak season requires higher working capital than lean season due to higher level of activity.
(iii) Production Cycle as working capital requirement is higher in firms with longer processing cycle.
(iv) Credit allowed to customers results in higher amount of debtors, increasing the working capital requirement.
(v) Operating efficiency as firms managing their raw materials
efficiently require lesser working capital.
(vi) Free and continuous availability of raw materials enables the firms to keep lesser stock and hence work with smaller working capital.
(vii) Higher Growth prospects will require larger amounts of working capital so that the firm is able to meet higher production and sales targets
(viii) Level of competition as higher competition requires larger stocks to meet urgent orders from customers and thus higher working capital.
(ix) Inflation increases the working capital requirements as larger amount of money is required to maintain a constant volume of production and sales.