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1 SIZE OF BUSINESS: Working capital requirement of a firm is directly influenced by the size of

its business operation. Big business organizations require more working capital than the small
business organization. Therefore, the size of organization is one of the major determinants of
working capital.

2. NATURE OF BUSINESS: Working capital requirement depends upon the nature of business
carried by the firm. Normally, manufacturing industries and trading organizations need more working
capital than in the service business organizations. A service sector does not require any amount of
stock of goods. In service enterprises, there are less credit transactions. But in the manufacturing or
trading firm, credit sales and advance related transactions are in large amount. So, they need more
working capital.
3 BUSINESS CYCLE: The need for the working capital is affected by various stages of the business
cycle. During the boom period, the demand of a product increases and sales also increase.
Therefore, more working capital is needed. On the contrary, during the period of depression, the
demand declines and it affects both the production and sales of goods. Therefore, in such a situation
less working capital is required.
4. CREDIT PERIOD: Credit period allowed to customers is also one of the major factors which
influence the requirement of working capital. Longer credit period requires more investment in
debtors and hence more working capital is needed. But, the firm which allows less credit period to
customers needs less working capital.
5. Dividend policy: The dividend policy of the firm is an important determinant of working capital. The
need for working capital can be met with the retained earnings. If a firm retains more profit and
distributes lower amount of dividend, it needs less working capital.
6. Working capital cycle: When the working capital cycle of a firm is long, it will require larger amount
of working capital. But, if working capital cycle is short, it will need less working capital.

7. Potential Growth or Expansion of Business: If the business is to be extended in future, more


working capital is required. More amount of working capital is required to meet the expansion need
of business.
8. Access to Money Market: If a firm has good access to capital market, it can raise loan from bank
and financial institutions. It results in minimization of need of working capital.

Importance of working capital management


Some time, if creditors demands their money from company, at this time company's high
working capital saves company from this situation. You know that selling of current assets
are easy in small period of time but Company cannot sell their fixed assets with in small
period of time. So, if Company have sufficient working capital, Company can easily pay off
the creditors and create his reputation in market. But If a company have zero working
capital and then company can not pay creditors in emergency time and either company
becomes bankrupt or takes loan at higher rate of Interest. In both condition, it is very
dangerous and always Company's Account Manager tries to keep some amount of working
capital for creating goodwill in market .
Positive working capital enables also to pay day to day expenses like wages, salaries,
overheads and other operating expenses. Because sufficient working capital can not only
pay maturity liabilities but also outstanding liabilities without any more delay.
One of advantages of positive working capital that Company can do every risky work
without any tension of self security.

Managing capital; maximising profits


Good capital management ensures that the cash available to a business always exceeds its current
liabilities, otherwise the business can risk running into problems associated with having a working
capital deficit. In the short term this can damage the profitability of the business, and affect its
operations. In the long term, poor working capital management can compromise a companys
eligibility for business loans, and damage its ability to attract potential investors.
A well-qualified and broadly experienced accounts manager can be worth his or her weight in gold in
this field, ensuring the smooth running and steady growth of the business by means of skilful capital
management. This may involve balancing the companys finances with attention to outstanding

incomes, creditors and inventory, and a capable accounts manager will be able to judge when it is
prudent to buffer or bolster the companys working capital by taking on a short term loan.
Nourishing capital; feeding growth
The appointment of an accounts manager, or interim financial consultant, can provide additional
security by underpinning a companys growth rate with careful regulation of investment plans and
efficient handling of profit. A well thought-out capital management strategy will also be able to
identify the right time to move into the cash conversion period, where a companys assets are
monetised, bearing in mind that it is not always possible to liquidate assets at short notice, or within a
limited time frame.
As well as managing risks like this, a good accounts manager will be able to make the companys
resources and assets work harder, knowing when to fire up growth by pumping profits back into the
business, and how to manage debt and credit in order to maintain the security of the company and
its workforce.
Protection in an uncertain market
In order to protect a company from financial difficulties, and guard against bankruptcy, it is vital that a
business has sufficient cash flow to pay its employees, service its debts, pay its liabilities without
delay and react promptly and decisively to competition and changes in the market. An effective
working capital management strategy should anticipate all of the above, and help to consolidate a
companys gains thus far, whilst also paving the way for future successes.

Purpose of Financial Statements


The objective of financial statements is to provide information about the financial position, performance
and changes in financial position of an enterprise that is useful to a wide range of users in making
economic decisions (IASB Framework).
Financial Statements provide useful information to a wide range of users:
Managers require Financial Statements to manage the affairs of the company by assessing its financial
performance and position and taking important business decisions.
Shareholders use Financial Statements to assess the risk and return of their investment in the company
and take investment decisions based on their analysis.
Prospective Investors need Financial Statements to assess the viability of investing in a company.
Investors may predict future dividends based on the profits disclosed in the Financial Statements.
Furthermore, risks associated with the investment may be gauged from the Financial Statements. For
instance, fluctuating profits indicate higher risk. Therefore, Financial Statements provide a basis for the
investment decisions of potential investors.

Financial Institutions (e.g. banks) use Financial Statements to decide whether to grant a loan or credit
to a business. Financial institutions assess the financial health of a business to determine the probability
of a bad loan. Any decision to lend must be supported by a sufficient asset base and liquidity.
Suppliers need Financial Statements to assess the credit worthiness of a business and ascertain
whether to supply goods on credit. Suppliers need to know if they will be repaid. Terms of credit are set
according to the assessment of their customers' financial health.
Customers use Financial Statements to assess whether a supplier has the resources to ensure the
steady supply of goods in the future. This is especially vital where a customer is dependant on a supplier
for a specialized component.
Employees use Financial Statements for assessing the company's profitability and its consequence on
their future remuneration and job security.
Competitors compare their performance with rival companies to learn and develop strategies to improve
their competitiveness.
General Public may be interested in the effects of a company on the economy, environment and the local
community.
Governments require Financial Statements to determine the correctness of tax declared in the tax
returns. Government also keeps track of economic progress through analysis of Financial Statements of
businesses from different sectors of the economy.
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