Page 4 - Lesson Note 6

Larger the lead time, larger the quantity of material to be stored and larger shall

be the amount of working capital required.

10. Growth Prospects: If the growth potential of a concern is perceived to be
higher, it will require larger amount of working capital so that it is able to meet
higher production and sales target whenever required.

11. Level of Competition: Higher level of competitiveness may necessitate larger

stocks of finished goods to meet urgent orders from customers. This increases the
working capital requirement. Competition may also force the firm to extend

liberal credit terms discussed earlier.

12. Inflation: With rising prices, larger amounts are required even to maintain a

constant volume of production and sales. The working capital requirement of a
business thus, becomes higher with higher rate of inflation. It must, however, be

noted that an inflation rate of 5%, does not mean that every component of
working capital will change by the same percentage. The actual requirement shall

depend upon the rates of price change of different components (e.g., raw
material, finished goods, labour cost,) finished goods as well as their proportion in
the total requirement.