a) Rate of stock turnover: A firm having a high rate of stock turnover will need lower amount of working capital as compared to a firm having a low rate of turnover
b) Credit Policy: Credit Policy of a concern in its dealings with debtors and creditors influence considerable the requirements of working capital.
c) Business Cycle: Business Cycle refers to alternate expansion and contraction in general business activity.
PRINICIPLES OF WORKING CAPITAL
The following are the general principles of a sound working capital management policy as follows:
(A)PRINCIPLES OF RISK VARIATIONS:
Risk here refers to the in ability of a firm to meet its obligations as and when they become due for payment. Larger investments in current assets with less dependency on short - term borrowings increases liquidity, reduces dependence on short-term borrowing increases liquidity, reduces risk and thereby decreases the opportunity for gain or loss. On the other hand less investment in current assets greater dependence on short - term loans increases risk, reduces liquidity and increases profitability. In other words, there is a definite inverse relationship between the degree of risk and profitability.
a) Principle of cost of capital:
The various sources of raising working capital finance have different cost of capital and the degree of risk involved. Generally, higher the risk lower is the cost and the lower the risk higher the
cost. A sound working capital management should always try to achieve a proper balance between these two.
b) Principle of equity position:
This principle is concerned with planning the total investment in current assets. According to this principle, the amount of working capital invested in each component should be adequately justified by a firm’s equity position.
c) Principle of maturity of payment:
The principle is concerned with planning the total i9nvestment in current assets. According to this principle, a firm should make very effort to relate maturities of payment to its flow of internally generated funds. Maturity pattern of various current obligations is and important factor in risk assumptions and risk assessment.
(B)ESTIMATION OF WORKING CAPITAL
Following is the brief explanation of the various techniques of estimating working capital requirements as follows.
a) Estimation of components of working capital:
Since working capital is the excess of current assets over current liabilities, estimating the amounts of different constituents of working capital can make an assessment of the working capital requirements.
b) Percent of sales method:
This is traditional and simple method of estimating working capital requirements. According to this method, on the basis of past experience between sales and working capital requirements a ration can be determined for estimating the working capital requirements in future.
c) Operating cycle approach:
According to this approach, the requirements of working capital depend upon the operating cycle of the business. The operating
cycle begins with acquisition of raw materials and ends with collection of receivables. The duration of the operating cycle for the purpose of estimating working capital requirements is equivalent to the sum of the duration of each of the operation cycle stages less than credit period allowed by the suppliers of the firm.
SOURCES OF WORKING CAPITAL REQUIREMETS
The source of working capital requirements is classified into two types they are fixed source and variable source they are as follows:
(A)Fixed Source:
Shares. Debentures Public Deposits
Plaguing back of profits.
Loans from financial institutions.
(B)Variable Source : Commercial banks Indigenous bankers Trade creditors Installment credit Advances
Accounts receivable - credit/ factoring Accrued expenses
Commercial paper
TYPES OF WORKING CAPITAL:
Every business enterprise must have adequate working funds for normal operations. In addition, it has to make arrangements for extra funds to meet seasonal demands or special orders.
(A) Permanent working capital:
It refers to the irreducible minimum reserves to be kept for maintaining a normal level of stock of raw materials, work–in-progress, finished goods and for paying wages and salaries during the year. It is permanently locked up in current assets. Permanent working capital is of two kinds.
a) Initial working capital:
At its inception and during the formation period of its operation, a company must have enough cash fund to meet its obligations. In the initial years its revenues may not be regular and adequate, credit arrangement may not be available from banks etc., till it has established its credit standing and credit may have to be granted on sales to attract the customers.
b) Regular working capital:
It is the amount needed for the continuous operations of the business of the company. It refers to excess of current assets over current liabilities, so that the process of conversion of each into stock into sales, receivables and collections is maintained without any break.
(A) Variable or Circular working capital:
Most of the business enterprises have to produce additional working capital to meet seasonal and special needs. On the basis, variable capital is classified into two types
a) Seasonal working capital:
Obviously, it refers to financial requirements that crop up during the particular season. Beyond their initial and regular circulating capital, most business will require at stated intervals a large amount of current assets to fill the demands of the seasonal busy periods.
b) Special working capital:
All business enterprises have to be prepared to meet unforeseen eventualities that may arise in the course of their operations. Therefore, they must have extra funds at ‘unstated periods to meet contingencies’.