Factors that Affect Working Capital Needs
There are many internal and external factors that affect how much working cash a business needs. Understanding these things is important for managing working capital well. These important things can change how much working cash you need,
1. Sales Growth: When sales grow quickly, companies often need to spend more on inventory, accounts receivable, and other running assets, which means they need more working capital.
2. Seasonality: Business with seasonal demand need different amounts of working cash at different times of the year. During busy times, you might need more supplies and accounts receivable to keep up with customer demand.
3. Industry Characteristics: The amount of working capital needed by different businesses is different. For instance, companies that make things might need to spend more on inventory and raw materials, while companies that provide services might not need as much inventory.
4. Terms with Suppliers and Customers: The credit terms you agree to with suppliers and customers have an effect on your operating capital. Longer payment terms with providers can lower cash outflows right away, while shorter terms with customers can speed up cash collections.
5. Production Cycle: The time it takes to turn raw materials into finished goods and then sell those goods can change how much operating capital is needed. When the output cycle is longer, more inventory is usually needed.
6. Credit Policies: Accounts outstanding are affected by the credit policies a business sets and the terms of credit it offers to customers. Tougher credit rules might make it easier to get cash faster, but they might also lower the number of sales.