Question

Explain the following factors affecting the working capital requirements of a business:
(i) Operating Efficiency
(ii) Credit Availed
(iii) Level of Competition

Hint:

Efficient working capital management ensures smooth operations by balancing liquidity and profitability.

Answer 1

(i) Operating Efficiency
- A firm’s ability to manage its operations efficiently impacts its working capital needs.
- Better operational efficiency reduces raw material, finished goods, and debtor levels, leading to lower working capital requirements.
(ii) Credit Availed
- If a firm obtains credit from suppliers, its requirement for working capital decreases as immediate cash outflows are reduced.
- Conversely, if the firm provides credit to customers, it will need more working capital to manage delayed payments.
(iii) Level of Competition
- In highly competitive markets, businesses need larger inventories to fulfill urgent customer orders, increasing working capital needs.
- Competition may also lead firms to offer more liberal credit terms to customers, further affecting working capital requirements.