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Business Studies · 2022 · 3 marks
CBSE 2022 · Region 1 · Set 1 · Q7
State any three factors affecting working capital
requirements of a company.
Marking-scheme solution
Factors affecting working capital requirements
of a company
(i)
The nature of a business influences the amount of
working capital required 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 is a factor affecting working
capital 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, the sales as well as production are likely to
be larger and, therefore, 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.
(vi)
A liberal credit policy results in higher amount of
debtors, increasing the requirement of working
capital.
(vii)
To the extent a firm avails the credit on purchases
from its suppliers, the working capital requirement is
reduced.
(viii)
Operating efficiency affects the requirement of
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.
(ix)
Free and continuous availability of raw material
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.
(xi)
Higher level of competition may necessitate larger
stocks of finished goods to meet urgent orders from
customers, thereby, increasing the working capital
requirement.
(xii)
The working capital requirement of a business
become higher with higher rate of inflation.
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CBSE Class 12 Business Studies past-paper question from the 2022board exam, with the answer as CBSE’s own marking scheme gives it. Where our answers come from.