Question

Explain the following factors affecting the working capital requirements of a company :
(a) Level of competition
(b) Inflation

Hint:

Working capital requirements are dynamic and influenced by both internal business needs and external economic conditions.

Answer 1

(a) Level of Competition:
In highly competitive industries, companies need to maintain higher inventory levels and provide better credit terms to customers to retain their market share. This increases the working capital requirement as more funds are tied up in inventory and receivables. For example, FMCG companies compete on service efficiency and stock availability, which demand higher levels of working capital.
(b) Inflation:
Inflation causes a general rise in the prices of raw materials, labor, and other operating expenses. As a result, companies require more funds to maintain the same level of operations, leading to increased working capital needs. Moreover, inflation can lead to uncertainty and may result in higher inventory stocking to avoid future price increases.
Final Answer: (a) Level of competition (b) Inflation