Question

Explain the following factors affecting the working capital requirements of a company:

(a) Level of competition

(b) Inflation

Hint:

Higher competition requires more stock and credit flexibility, while inflation increases working capital due to rising costs.

Answer 1

(a) Level of Competition: A higher level of competition increases the need for working capital. It may require a company to maintain higher stocks of finished goods to meet urgent customer demands. Additionally, competition often necessitates liberal credit terms to retain customers, further increasing working capital requirements.

(b) Inflation: Inflation raises the prices of raw materials, labour, and other inputs, increasing the working capital requirements of a company.