Explain briefly any four factors that affect the working capital requirements of a company.

Following are the factors affecting the working capital of a company:

(i) Length of Operating cycle/Production cycle: Operating cycle refers to the length of the manufacturing cycle, i.e., the periods taken to convert raw materials into finished products. A longer period means more working capital requirements and vice versa.

(ii) Credit policy/Credit allowed: If liberal credit terms are given and a liberal policy is followed, then the company would require more working capital as there is less cash inflow and vice versa.

(iii) Nature of business: A manufacturing firm requires a higher amount of working capital as compared to a trading organisation, to convert raw materials into finished goods.

(iv) Scale of operations: A large amount of working capital is required by firms operating on a large scale of operations in terms of debt, inventory, etc. as compared to the small scale firms.

(v) Seasonal factor: A higher amount of working capital is required by the organisation during its peak season as the level of activities is higher as compared to the lean season.

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