Factors affecting working capital and Sources of Working Capital Finance

Q. Explain the factors affecting working capital requirement.

Main factors affecting the working capital are as follows:

1) Nature of Business

2) Scale of Operations

3) Business cycle

4) Production cycle

5) Seasonal Factors

6) Credit allowed

7) Credit availed

8) Operating efficiency

9) Availability of Raw Material

10) Growth Prospects

11) Level of Competition

12) Inflation

Q. Explain different sources of financing working capital.

Common Sources of Working Capital Finance:

Loans from Commercial Banks: Small scale industries can raise loans from the commercial banks with or without security. This method of financing does not require any legal formality except that of creating a mortgage on the assets.

Public Deposits: Often companies find it easy and convenient to raise, short-term funds by inviting shareholders, employees and the general public to deposit their savings with the company.

Trade Credit: Just as the companies sell goods on credit, they also buy raw materials, components and other goods on credit from their suppliers.

Factoring: Factoring is a financial service designed to help firms in managing their book debts and receivables in a better manner.

Discounting Bills of Exchange: When goods are sold on credit, bills of exchange are generally drawn for acceptance by the buyers of goods. The bills are generally drawn for a period of 3 to 6 months. In practice, the writer of the bill, instead of holding the bill till the date of maturity, prefers to discount them with commercial banks on payment of a charge known as discount.

Bank Overdraft and Cash Credit: Overdraft is a facility extended by the banks to their current account holders for a short-period generally a week.

Advances from Customers: One way of raising funds for short-term requirement is to demand for advance from one’s own customers.

Accrual Accounts: Generally, there is a certain amount of time gap between incomes is earned and is actually received or expenditure becomes due and is actually paid. Salaries, wages and taxes.