The working capital needs of a firm are influenced by many factors. The important ones are as follows:
Nature of business: The working capital necessity of a firm is closely linked to the nature of its business. In common businesses along with short operating cycles will need lesser amount of working capital as compared to businesses along with longer operating cycles. The firms involved in manufacturing and trading will necessitate more working capital as huge amount of funds are locked in receivables and inventories. In common service and utility companies as like water, electricity undertakings, supply, and telecom companies will need lesser amount of working capital as compared to trading and manufacturing links. Table no.2 illustrates the relative proportion of investment in current assets and fixed assets of specific industries.
Table no: Proportion of current assets and fixed assets
|
Current Assets %
|
Fixed Assets %
|
Industries
|
|
10-20
20-30
|
80-90
70-80
|
Hotels and restaurants Electricity generation and Distribution
|
|
30-40
40-50
|
60-70
50-60
|
Aluminum and Shipping Iron and Steel, Basic industries, Chemicals
|
|
50-60
60-70
|
40-50
30-40
|
Tea plantation
Cotton textiles, Sugar
|
|
70-80
80-90
|
20-30
10-20
|
Edible oils, Tobacco
Trading, Construction
|
Business Cycle: throughout economic boom there is increased production that need higher amount of working capital, but it is partly offset through decreased operating cycle. Again there would be required for increase working capital at the time of economic downturn, as huge amount of funds would be locked within inventories and receivables.