Question

Explain the following factors affecting the working capital requirements of a company :
(a) Level of competition
(b) Inflation

Hint:

Working capital requirements are dynamic and influenced by both internal business needs and external economic conditions.

Answer 1

(a) Competitive Intensity:
In industries with intense competition, businesses must sustain elevated inventory and extend more favorable credit conditions to customers to preserve their market standing. This elevates the demand for working capital due to greater investment in inventory and accounts receivable. For instance, Fast-Moving Consumer Goods (FMCG) firms compete on service speed and product availability, necessitating higher working capital.

(b) Price Increases:
Inflation drives up the costs of raw materials, labor, and other operational expenditures. Consequently, businesses need more capital to sustain existing operational scales, thereby increasing working capital requirements. Furthermore, inflationary periods introduce uncertainty and can prompt businesses to increase inventory levels to mitigate the impact of anticipated future price hikes.

Final Answer: (a) Level of competition (b) Inflation