Question

Determinant of working capital is

• A. Size of the enterprise
• B. Period of manufacturing process
• C. Availability of raw materials
• D. All of these

Hint:

Anything that lengthens the time it takes to convert raw materials back into cash (the operating cycle) or increases the scale of operations will increase the need for working capital.

Answer 1

The Correct Option is D

Step 1: Understanding the Question:
The question asks to identify the factors that determine the amount of working capital a business requires.
Step 2: Key Concept:
Working capital is the capital required for day-to-day operations (Current Assets - Current Liabilities). The amount needed depends on various factors related to the nature and scale of the business operations.
Step 3: Detailed Explanation:
Let's examine how each factor affects working capital needs:

(A) Size of the enterprise: A larger firm, with higher levels of production and sales, will need to hold more inventory and will have a larger amount of accounts receivable compared to a smaller firm. Therefore, larger size means higher working capital requirements.

(B) Period of manufacturing process: This is a key component of the operating cycle. A longer manufacturing process means funds are locked up in work-in-progress for a longer duration, leading to a need for more working capital.

(C) Availability of raw materials: If raw materials are not easily available or if their supply is uncertain, a company must maintain a larger stock of raw materials to ensure uninterrupted production. This increases the investment in inventory and thus the working capital requirement.

Since all the listed factors have a direct impact on the working capital needs of a firm, they are all determinants.
Step 4: Final Answer:
The correct answer is (D) All of these.