Question

A company following liberal credit policy will require _________ working capital. (more / less)

Hint:

Liberal credit policy increases receivables, which leads to a higher requirement of working capital.

Answer 1

A company following a liberal credit policy will require more working capital.
A liberal credit policy means that the firm allows its customers a longer period to make payments for goods sold. As a result, the amount of debtors or accounts receivable increases.
When customers take more time to pay, the firm’s money remains blocked in receivables for a longer duration. This reduces the immediate availability of cash.
To continue its day-to-day operations such as purchasing raw materials, paying wages, and meeting other operating expenses, the company needs additional funds.
Therefore, due to higher receivables and blocked funds, a firm following a liberal credit policy requires more working capital.