What are the Factors Affecting a Company’s Working Capital?

Although there are no hard and fast rules for determining the working capital for a company, there are many factors that affect it. It is the duty of management to judge the right amount of working capital for running the organization and keep the adequate amount of working capital available for the firm to stay competitive in the business operations.

Factors Affecting Company’s Working Capital

Here are some of the most influential factors that impact the working capital of a company.

Nature of the Business

The nature of the business influences the working capital to a large extent. Financial and trading firms do not need enormous funds for fixed assets but they need to invest large sums in working capital.

Construction companies and manufacturers also need to invest little in fixed assets and more in working capital. Public utilities on the other hand need to invest more in fixed assets and less in working capital funds.

Market and Demand

Working capital requirements of a company are related to sales. However, it is not easy to determine the requirement of sales vis-a-vis working capital. Therefore, advance planning of working capital is necessary for a growing company.

A company that is in a rapid growth phase may need to invest funds in fixed assets. These companies also need to fund their growth with both internal and external sources. Therefore, the companies may not be able to pay dividends. In such a condition, a proper plan is necessary to maintain good working capital conditions.

Sales fluctuations impact temporary working capital needs differently at different instances of the sales cycle. A manufacturing company must therefore have enough temporary working capital if it wants to stay competitive in the market. To meet such a need, a company may initiate level productions where it stores during off-peak seasons and sales during the peak time of the cycle.

Manufacturing Cycle and Technology

It is important to note that in the case of manufacturing companies, there is an impact of technology on production. Some products such as boilers may need six to twenty months to complete the manufacturing and sales cycle while daily usable products such as soaps and detergents have a cycle of a few hours.

Therefore, different manufacturing periods are attached to different products and technologies for producing them. That is why companies must resort to different types of working capital conditions depending on technologies and manufacturing cycles.

Credit Policy

Companies usually offer their products and services in credit to their customers in order to compete in the market. Credit sales, however, create debtors and a company must not have a liberal credit policy to offer products to create a bad debt.

The companies, therefore, should have a proper credit policy that ensures timely collection and a genuine credit policy for the customers.

Credits Available from Suppliers

The availability of credit from suppliers reduces the working capital requirements of a company. Credit from suppliers can be used to finance inventories and to reduce the cash conversion cycle. Without the availability of credit from suppliers, a company would need to rely on banks for funds.

The company must look at the best rate of interest while it collects the funds from the banks. If a company gets bank loans on favorable terms, it won’t have to depend on working capital too much.

Operating Efficiency

Operating efficiency requires a company to produce the best resources using the minimum operating costs. To do so, it needs to use resources at the minimum cost.

The use of working capital is improved and the cash conversion cycle is minimized while the operating efficiency is enhanced. Better operating efficiency increases profitability and requires less working capital to produce an equivalent amount of products.

Price Level Changes

Changes in price level may hit the working capital requirements of the company. Some companies that rely on certain raw materials may be affected badly due to an increased price of the resources while some others that do not rely on the same may be free from the impact.

As price levels of different products may be different, the effect may be felt differently by the companies too. So, while some companies may be badly hit by price level changes, some others may be free from the impacts.


For a business organization, it is ideal to have a proper amount of working capital all the time. Businesses should always strive to create a balanced working capital in order to remain intact on the path of holistic profits and growth. With efficient handling of working capital, a firm may not only remain in good shape but can also become superbly competitive in its industry.