CBSE Class 12-commerce Answered
According to the facts mentioned in the above question following are the factors that affect the working capital and result in high or low working capital requirement:
Credit allowed: Credit policy refers to the average period for collection of sale proceeds. This depends on credit worthiness of clients. So, a company which allows liberal credit policy will require more working capital. In the above question, the company follows a liberal policy. Hence, it will have a high working capital requirement.
Nature of business: The nature of business is one of the important determinants of working capital requirement. For, instance, an organisation dealing in manufacturing would require large working capital. This is because it requires the organisation to convert raw materials into finished goods, provide goods on credit, maintain inventory etc. In the above case, Steelone is a manufacturing organisation, hence, it has a high working capital requirement.
From the facts of the above case, it is also implied that Steelone will have a long operating cycle as it follows a liberal credit policy due to which the working capital requirement will also be high. Hence, length of operating cycle is also one of the factors affecting the working capital requirement.