Factors Affecting the Working Capital Requirements:
(i) Nature of Business: The basic nature of a business enterprise influences the amount of working capital required by it. For e.g., a trading organisation needs a lower amount of working capital as compared to a manufacturing organisation.
(ii) Scale of Operations: An organisation which is operating on a large scale will require more inventory as its working capital requirement will be more, compared to small organisation.
(iii) Business Cycle: Business cycle is a series of cycles of economic expansion (boom) and contraction (slowdown or recession or bust) in an economy. It is directly linked' with working capital. During an economic boom, more working capital is needed as the demand increases and higher sales are generated. Conversely, during an economic contraction less working capital is required as the demand is low and sales generated would also be lower.
(iv) Seasonal Factors: In peak season, demand for a product will be high and thus, high working capital requirements will be more as compared to lean season. They are associated with demand for particular goods at a specific time of the year.
(v) Production Cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Working capital requirements will be higher in firms with longer processing cycle and lower in firms with shorter processing cycle.