Working capital or circulating capital is that part of total capital, which is required to meet day to day expenses, to purchase raw material, to pay wages and other expenses of routine nature in production process.
It include stock, debtor, cash, bank balance, tools, receivables, short term investment, etc. The factors determining the working capital needs of an enterprise are as follows:
(i) Nature of business (any four):
(a) Trading organisations requires lower amount of working capital.
(b) Manufacturing organisation requires large amount of working capital.
(c) Service enterprises requires lower amount of working capital.
(ii) Scale of operations: Organisations operating at large scale would require large amount of working capital as compared to organisations operating at lower scale.
(iii) Business cycle: During boom period, scale and production tend to be high and therefore higher amount of working capital is required. On the other hand during depression, working capital requirement is less because sale and production are slow.
(iv) Production cycle: Business organisations having longer production cycle will require more working capital as their money get locked in production process for a longer period.
(v) Credit allowed: If business organisation allowed long credit period to debtor, working capital requirement is large. However business organisation deals with cash, do not require large working capital.
(vi) Credit availed: The working capital requirement needs will be low if raw material and supplies are available on credit to a firm.
The other factors are: Seasonal factor, availability of raw material, growth prospects, inflation etc.