Explain in brief; Factors determining Working Capital

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Working capital is amount of funds invested in the current assets of a business. It is required to purchase raw material, payment of wages, electricity and gas bills, stocking of goods, paying short term loans, taxes and advertising bills. It is as important as circulation of blood for the business, working capital is essential to maintain smooth running, prosperity and stability of the business. It is very important for the daily operations of the business. There are many factors which can affect the working capital directly or indirectly.

One of them is nature of business. The working capital requirement of an enterprise basically depends upon the nature of its business. For example a trading concern requires large amount of working capital for investments in stocks, receivables and cash. It requires less investment in fixed assets. A business where the proportion of cost of raw material to be consumed to total cost of production is high, the amount of working capital required is large. The second factor is size of business the amount of working capital depends upon the scale of operation of business. The larger the size of the business unit the larger is the requirement of working capital. So the working capital is important for the business success.