Page 3 - Lesson Note 6

4. Seasonal Factors: Most business has some seasonality in their operations. In

peak season, because of higher level of activity, larger amount of working capital
is required. As against this, the level of activity as well as the requirement for

working capital will be lower during the lean season.

5. Production Cycle: Production cycle is the time span between the receipt of raw

material and their conversion into finished goods. Some businesses have a longer
production cycle while some have a shorter one. Duration and the length of

production cycle, affects the amount of funds required for raw materials and
expenses. Consequently, working capital requirement is higher in firms with

longer processing cycle and lower in firms with shorter processing cycle.

6. Credit Allowed: Different firms allow different credit terms to their customers.

These depend upon the level of competition that a firm faces as well as the credit
worthiness of their clientele. A liberal credit policy results in higher amount of

debtors, increasing the requirement of working capital.

7. Credit Availed: Just as a firm allows credit to its customers it also may get
credit from its suppliers. To the extent it avails the credit on purchases; the
working capital requirement is reduced.

8. Operating Efficiency: Firms manage their operations with varied degrees of

efficiency. For example, a firm managing its raw materials efficiently may be able
to manage with a smaller balance. This is reflected in a higher inventory turnover

ratio. Similarly, a better debtor’s turnover ratio may be achieved reducing the
amount tied up in receivables. Better sales effort may reduce the average time for
which finished goods inventory is held. Such efficiencies may reduce the level of

raw materials, finished goods and debtors resulting in lower requirement of
working capital.

9. Availability of Raw Material: If the raw materials and other required materials

are available freely and continuously, lower stock levels may suffice. If, however,
raw materials do not have a record of un-interrupted availability, higher stock
levels may be required. In addition, the time lag between the placement of order

and the actual receipt of the materials (also called lead time) is also relevant.