By the discussions we had previous, it is not tough to come to the conclusion that numerous factors influence the fund or net working capital needs.
Fund needs vary along with the nature and type of business. A firm which provides agency services may need less working capital compared to a firm that carries on business of merchandising. The merchandising firm of course would need to carry several inventory, provide credit and so on. Though, a firm that manufactures products may need more working capital than a retailer. Inventory of raw material, work-in-process and finished goods are carrying by the manufacturing company.
Working capital requirements are directly affected by sales volume. Along with every growth in sales volume we require to carry larger inventory, raised number of customers or receivables as also the operating expenses. This is possible that all the expenses may not move up proportionately. Though, we will have to finance several of these raises. This is also possible that all the expense might not move up proportionately. Conversely, we will have to finance several of these increases. This is also possible that the rise in sales volume could be brought about through granting extended credits. In other words, through investing more funds we raise the volume of sales.
Fund needs for the business may be seasonal. For illustration in industries using agricultural raw materials, this may be more advantageous to procure raw materials throughout harvest season. In case of consumer retailing this may be essential to hold large inventories during festive season. Most of the fund needs are restricted to a restricted period and if we give it on a permanent basis we might have idle funds during most part of the year.
Yet the other important aspect that may condition fund need is the velocity of circulation of current assets. Conversely, the length of the operating cycle will affect the need for funds. Shorter the period of operating cycle faster is the conversion of money invested in current assets in cash and thus lesser the requirements for net working capital.
Net working capital need is also influenced through the terms obtainable from the suppliers. The credit terms extended through the suppliers will determine the amount of additional funds needed.
A firm that carries a month's inventory and grants one month's credit to customers has to fund the inventory cost of two months. If this could avail credit of two months from the suppliers, the requirements for holding inventory and funding receivables is nil.
In the other situation, assume the firm carries a balance of Rs.10, 000 of accounts payable, payable in 30 days and an average accounts receivable balance of Rs. 15,000, receivable in 45 days, the firm will have to maintain a net working capital for the dissimilarity of receipts from customers and payments to creditors given as:
Rs.
Fund needed to meet payables due in 30 days 10,000
Less: Funds received from customers- 10,000
Received in 45 days, as Rs.15,000 x 30/45 10,000
Fund needed in the form of additional net working capital Nil
Suppose that the time taken for collection of receivable is 90 days the circumstances will be as:
Rs.
Fund needed meeting payables due in 30 days. 10,000
Less: Funds received from customers- Rs.15,000 x 30/90 5,000
Fund needed in the form of additional net working capital 5,000
We could summaries the discussion in respect of the requirement for working capital through saying that the capability of the firm to circulate the "cash → raw material inventory work-in procedure → finished goods inventory → receivables → cash" is the very important and significant factor in formative the amount of working capital. Though the precise amount required to be invested in all these will be determined through the period and quantum of holding of each of these components. It in turn is also influenced through the factors we have discussed in these sections.