Question

Explain the following factors affecting requirements of working capital of a company: (i) Nature of business (ii) Inflation (iii) Seasonal factors…

Accepted Answer

Factors affecting requirements of working capital of a company: (i) Nature of business: • A trading organisation usually needs a smaller amount of working capital as compared to a manufacturing organisation because there is usually no processing. • Service industries which usually do not have to maintain inventory require less working capital. (ii) Inflation: • With rising prices, larger amounts are required even to maintain a constant volume of production and sales. • The working capital requirement of a business becomes higher with higher rate of inflation. (iii) Seasonal factors: • In peak season, because of higher level of activity, larger amount of working capital is required by the business. • As against this, the level of activity as well as the requirement for working capital will be lower during the lean season by the business. (iv) Growth prospects: • If the growth potential of a concern is higher, it will require larger amount of working capital. • This is to enable it to meet higher production and sales target whenever required. OR: (i) Stability of dividend: • Companies generally follow a policy of stabilising dividend per share. • The increase in dividends is generally made when there is confidence that their earning potential has gone up and not just the earnings of the current year. (ii) Shareholders’ preference: • If the shareholders desire that at least a certain amount is paid as dividend, in general the companies are likely to declare the same. • There are always some shareholders who depend upon a regular income from their investments. • (iii) Access to capital market: Large and reputed companies depend less on retained earnings to finance their growth as they have easy access to • the capital market. Such companies pay higher dividends than the smaller companies which have relatively low access to the market. (iv) Legal constraints: • Certain provisions of the Companies Act place restrictions on payouts as dividend. • Such provisions must be adhered to while declaring the dividend.

Explain the following factors affecting requirements of
working capital of a company:
(i)
Nature of business
(ii)
Inflation
(iii)
Seasonal factors
(iv)
Growth prospects

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