DEPARTMENT OF TECHNICAL EDUCATION

ANDHRA PRADESH
Name of the staff member :Sreenivasa rao B.
Designation :Lecturer in CCP
Branch :Commercial and Computer Practice
Institute :S.U.V.R&s.R GPW,Ethamukkala
Semester :VI
Subject name :Banking II
Subject code :CCP 604 (B)
Major topic :Loans and Advances – Short Term & Long Term
Duration :50 minutes
Sub topic :Determinants of Working Capital.
Teaching aids :PPT
CCP604(B).7 1
Objectives :

On completion of this period you be able to

understand

 Factors determining the working capital

CCP604(B).7 2
Recap
So for you know
 Meaning of working capital
 Need for working capital
 Concepts of working capital
 Importance of working capital

CCP604(B).7 3
FACTORS DETERMINING THE WORKING

CAPITAL:
The working capital requirements of an enterprise
depends on a variety of factors. These factors
affect different enterprises differently and vary
from time to time . These factors are shown
below:
1. Nature of business,
2. Size of business,
3. Manufacturing cycle,
4. Business cycle,
CCP604(B).7 4
FACTORS DETERMINING THE
WORKING CAPITAL:
5. Product Policy,
6. Credit Policy,
7. Availability of Credit,
8. Growth and Expansion Activities
9. Price – level Changes,
10. Operating Efficiency,
11. Profit Margin & Profit Appropriation.

CCP604(B).7 5
Nature of Business
The working capital needs are basically influenced
by the nature of business. The proportion of current
assets to total assets measures the relative
requirements of working capital of various
industries.

Size of Business
The size of business also affects the working capital needs.
Size may be measured in terms of the scale of operations.
Larger the scale of operation, larger will be the firm’s
working capital requirements, smaller the scale of
operations, smaller will the firm’s working capital
requirements. CCP604(B).7 6
Manufacturing cycle

Manufacturing cycle also affects the working

capital needs. Manufacturing cycle refers to the
time gap between the purchase of raw materials
and the production of finished goods.

CCP604(B).7 7
Business cycle
 Seasonal and cyclical fluctuations in demand
for a product affect the working capital
requirements, especially the temporary working
capital requirements
 Seasonal fluctuations generally conform to a
steady pattern, financial arrangements for
seasonal working capital requirements should be
made in advance.

CCP604(B).7 8
Credit Policy

The credit policy of the firm affects working capital

by influencing the level of book debts. The credit
policy of a firm depends upon industry practice ,
current economic condition and the
management’s attitude. Its effect on working
capital is shown below:
Credit policy Effects
a) Liberal credit Higher credit sales , higher book
policy debts, higher working capital.

b) Tight credit Lower credit sales , lower book

policy debts , lower working capital.

CCP604(B).7 9
Production Policy
The production policy of the firm affects the
working capital by influencing the level of
inventories .

Availability of Credit from supplies

The working capital requirements are also
determined by the credit terms available to the
firm from its creditors.
 A firm will need less working capital if liberal
credit terms are available to it. A firm will need
more working capital if no credit or tight credit
terms are available to it.
CCP604(B).7 10
Growth and Expansion Activities
Growing firm requires more working capital than
those that are static. As a company grows, logically
larger amount of working capital will be needed.

Price Level Changes

Changes in the price level also affect the working
capital requirements.

CCP604(B).7 11
Operating Efficiency
The operating efficiency means the optimum
utilization of resources at minimum costs.
The operating efficiency of management also
affects the level of working capital .
 It is shown below.

Better Reduction Releases the

Improves pressure on
Utilisation in
Profitabili working
of Operating
ty capital
Resources costs

CCP604(B).7 12
Profit Margin and Profit Appropriation

 Profit margin also effects the level of working

capital.

 A high net profit margin contributes towards

the working capital pool.

CCP604(B).7 13
Summary

 The working capital requirements of an

enterprises depends on a variety of factors.
 The factors include nature of business, size of
business, product policy, growths and
expansion activities, operating efficiency etc.
 These factors affects different enterprises
differently and vary from time to time.

CCP604(B).7 14
 Quiz

1) The following factor will affect requirement of working

capital;
 Nature of business

 Customers

 Workers

 Current liabilities.

CCP604(B).7 15
Frequently Asked Questions

1. What is meant by working capital?

3. Explain the factors determining the working

capital?

CCP604(B).7 16