CBSE 2025, BS Set 1

Question

Explain the following **factors affecting working capital requirements** of a business:

(i) Nature of business

(ii) Credit availed

(iii) Operating efficiency

(iv) Seasonal factors

Edvaya · Accepted Answer

The correct answer is Subjective. **(i) Nature of business:** The basic nature of a business significantly influences its working capital requirement. A **trading organisation** (buys and sells without processing) generally needs less working capital than a **manufacturing organisation** (which must maintain raw materials, work-in-progress, and finished goods). **Service industries** require the least working capital as they carry no inventory. Thus, the more complex and production-intensive the business, the higher the working capital requirement. **(ii) Credit availed:** If a firm is able to procure raw materials and other inputs **on credit** from its suppliers easily, it ties up less cash and therefore requires less working capital. Conversely, if the firm must make all purchases on a **cash basis**, a larger amount of working capital is required to meet these immediate payments. **(iii) Operating efficiency:** Firms that operate efficiently — converting raw materials to finished goods quickly, collecting debts promptly, and managing inventory effectively — require **less working capital** because funds are not unnecessarily tied up at any stage. Firms with poor operational efficiency (slow production cycles, high debt collection periods, slow inventory turnover) require more working capital. **(iv) Seasonal factors:** Businesses with **seasonal demand** require higher working capital during **peak seasons** to produce and stock goods in advance. During **lean or off-peak seasons**, the working capital requirement reduces. For example, an umbrella manufacturer requires more working capital before and during the monsoon season and less during summer.

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