Factors affecting the working capital
The firm must estimate its working capital very accurately because excessive working capital result in unnecessary accumulation of inventory and wastage of capital whereas shortage of working capital affect the smooth flow of operating cycle and business fails to meet its commitment. So finance manager must keep in mind following factors before estimating the amount of working capital.
The amount of working capital directly depends upon the length of operating cycle. Operating cycle refers to the time period involved in production. It starts right form acquisition of raw material and ends till payment is received after sale. The working capital is very important for the smooth flow of operating cycle.
If operating cycle is long then more working capital is required whereas for companies having short operating cycle, the working capital requirement is less. Credit policy refers to average period for collection of sale proceeds.
It depends on number of factors such as creditworthiness, of clients, industry norms, etc. lf company is following liberal credit policy then it will require more working capital whereas if company is following strict or short term credit policy, then it can mange with less working capital also.