What is meant by ‘Working Capital’? Describe any four factors which affect the working capital requirements of a company.

Working Capital means the portion of capital invested in short-term assets of a firm. It is the excess of current assets over current liabilities. Factors that determine the working capital requirements are as follows:

(i) Business cycle: During a boom period, when sales are high, a higher amount of working capital is required as compared to the depression period.

(ii) Credit availed: If it is difficult to avail credit by the firm (on its purchases) from suppliers, then higher amount of working capital is required.

(iii) Operating efficiency: Less requirement of working capital will be there in a firm in the presence of best sales effort, ideal debtors turnover ratio and higher inventory turnover ratio.

(iv) Level of competition: Working capital requirements will be more if level of competition is high.