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Business Studies · 2023 · 4 marks
CBSE 2023 · Region 3 · Set 3 · Q28
State any four factors affecting the requirements of the capital needed for
day-to-day working of the business.
Marking-scheme solution
Factors affecting Working Capital :
(i)
The nature of a business as a trading
organisation usually needs a smaller amount of
working capital compared to a manufacturing
organisation. Service industries which usually do
not have to maintain inventory require less
working capital.
(ii)
Scale of operation as organisations which
operate on a higher scale of operation require
large amount of working capital as compared to
the organisations which operate on a lower scale.
(iii)
Different phases of business cycles affect the
requirement of working capital by a firm as in
case of a boom, larger amount of working capital
is required while during depression, the
requirement of working capital will be
comparatively low.
(iv)
Seasonality in operations affects working capital
requirements as in peak season, larger amount of
working capital is required while the
requirement for working capital will be lower
during the lean season.
(v)
Working capital requirement is higher in firms
with longer production cycle and lower in firms
with shorter production cycle.
A liberal credit policy results in higher amount
(vi)
of debtors, increasing the requirement of
working capital.
To the extent a firm avails the credit on
(vii)
purchases from its suppliers, the working capital
requirement is reduced.
Operating efficiency affects the requirement of
(viii)
working capital as firms which manage their
operations efficiently may reduce the level of
raw materials, finished goods and debtors
resulting in lower requirement of working
capital.
Free and continuous availability of raw material
(ix)
will reduce the requirement of working capital
whereas larger time lag between placement of
order and receipt of material will lead to
requirement of larger working capital.
(x)
If a firm has higher growth prospects, it will
require larger amount of working capital so that
it is able to meet higher production and sales
target whenever required.
Higher level of competition may necessitate
(xi)
larger stocks of finished goods to meet urgent
orders from customers, thereby, increasing the
working capital requirement.
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CBSE Class 12 Business Studies past-paper question from the 2023board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.