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Ashutosh Savarkar has recently opened a Tortilla base manufacturing unit in Pune. Processing time being short, as soon as the product is ready, it is dispatched to various outlets and restaurants, in order to keep it fresh. The restaurants are required to give their orders 24 hours in advance as there is no fixed consumption pattern in the city.

(a) Determine whether the working capital requirement of Ashutosh Savarkar’s business is high/low? State the reason in support of your answer.

(b) State any three other factors, apart from the one identified above, that should be considered, while determining the working capital requirement of a business.

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(a) The working capital requirement of Ashutosh Savarkar is low as the production cycle is shorter 

(b) Factors that should be considered before determining the working capital requirement are:

1. Nature of Business: A trading organisation usually needs a smaller amount of working capital compared to a manufacturing organisation. This is because there is usually no processing. Similarly, service industries which usually do not have to maintain inventory require less working capital. 

2. Scale of Operations: For organisations which operate on a higher scale of operation, the quantum of inventory and debtors required is generally high. Such organisations, therefore, require large amount of working capital 

3. Business Cycle: In case of a boom, the sales as well as production are likely to be larger and, therefore, a larger amount of working capital is required. As against this, the requirement for working capital will be lower during the period of depression as the sales as well as production will be small. 

4. Seasonal Factors: In peak season, because of higher level of activity, larger amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season. 

5. Credit Allowed: Different firms allow different credit terms to their customers. A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital. 

6. Credit Availed: Just as a firm allows credit to its customers it also may get credit from its suppliers. To the extent it avails the credit on purchases, the working capital requirement is reduced. 

7. Operating Efficiency: Firms manage their operations with varied degrees of efficiency. Such efficiencies may reduce the level of raw materials, finished goods and debtors resulting in lower requirement of working capital. 

8. Availability of Raw Material: If the raw materials and other required materials are available freely and continuously, lower stock levels may suffice. In addition, the time lag between the placement of order and the actual receipt of the materials (also called lead time) is also relevant. 

9. Growth Prospects: If the growth potential of a concern is perceived to be higher, it will require a larger amount of working capital so that it is able to meet higher production and sales targets whenever required. 

10. Level of Competition: Higher level of competitiveness may necessitate larger stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement.

11. Inflation: With rising prices, larger amounts are required even to maintain a constant volume of production and sales. The working capital requirement of a business thus, become higher with higher rate of inflation.

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