Question 4 (b)

Determinants of working capital needs

7 marks

Time to write
About 14 minutes

From an older CBCS paper

Question

Question 4 (b) · 7 marks

Explain the major determinants of a business firm's working capital needs.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

14 minfor 7 marks

Read from the question

  • ExplainEach point stated, then explained in a line or two.

Write it in this order

  1. Read; underline the asks; jot your points 1 min
  2. 1 Nature, size, production policy and production cycle 2½ marks 4 min
  3. 2 Credit policy, business cycles and growth 2½ marks 4 min
  4. 3 Earnings, dividends, prices and other factors 2 marks 4 min
  5. Check: every ask answered, key terms underlined 1 min

Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks.

Try it first. About 14 minutes for 7 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Working capital is the fund needed for day-to-day operations; the amount a firm needs depends on many factors.

Major determinants

  1. Nature of business: a business whose sales are mostly in cash, such as a restaurant, needs little; public utilities selling services for cash need little; trading and financial firms need a great deal; manufacturers fall in between.
  2. Size and scale of operations: the larger the business, the more working capital it needs.
  3. Production policy: steady production through the year, building stocks in the slack season, needs more working capital than producing to match seasonal demand.
  4. Length of the production cycle: the longer the manufacturing process, the longer funds stay tied up in work-in-progress.
  5. Credit policy: buying on credit and selling for cash needs little; buying for cash and selling on credit needs much more.
  6. Business cycles: a boom needs more working capital for higher sales and prices; in a depression funds may lie idle.
  7. Rate of growth: fast-growing firms need large and rising working capital.
  8. Earning capacity and dividend policy: high cash profits add to working capital; a high cash dividend drains it.
  9. Price level changes: rising prices require more funds for the same volume.
  10. Seasonal variations: firms whose sales or raw material supply are seasonal need more working capital in the peak season.
  11. Operating efficiency: faster conversion of stock and debtors into cash, through good management, reduces the working capital required.
  12. Availability of credit and raw materials: generous supplier credit and an assured supply of materials reduce the stocks and funds a firm must carry.

Where the 7 marks sit

#ComponentMarks
1Nature, size, production policy and production cycle2.5
2Credit policy, business cycles and growth2.5
3Earnings, dividends, prices and other factors2
Total7
Keyboard: ← → previous and next question, / search

Report a problemopens an email to admin@getkunji.com with the question ID3066-Q4balready filled in.