Working Capital Fundamentals

How is the volume of sales related to working capital?

What impact does a longer production cycle have on working capital?

During which economic condition is the need for working capital typically higher?

What effect do favorable purchase terms typically have on a company's working capital needs?

How does effective credit control affect a company's working capital?

In the context of growth and expansion, what does a company typically require?

What is the role of management ability in working capital needs?

How can access to funds from financial institutions impact working capital?

Working Capital

Volume of sales is a key factor impacting working capital needs. Higher sales volume requires more capital.
Production cycles affect working capital. Longer cycles require more capital.
Business cycles also influence working capital. Booms increase, recessions decrease working capital needed.
Credit terms (purchases/sales) influence capital requirements. Liberal credit policies for sales and tight credit policies for purchases reduce capital needs.
Sound credit control policies enhance cash flow and reduce capital requirements. Liberal policies increase bad debt risk affecting capital requirements.
Growth and expansion demand more working capital for increased operations.
Management ability (coordination between production and distribution) reduces working capital requirements. Poor inventory management increases working capital needs.
External financial factors (e.g., access to bank loans) reduce a business's internal working capital requirements.

Capital Structure

Companies fund themselves through various sources: equity shares, preferred stock, reserves, surpluses, debt (debentures, loans).
The combination of these funding sources is called the capital structure. This also includes the security mix for the business.

This quiz explores the essential factors affecting working capital, including sales volume, production cycles, and credit terms. It also discusses the impact of business cycles and management on capital requirements. Test your understanding of how external financial factors influence working capital needs.