Investment of working capital:
How much to be invested in current assets as working capital is a matter of policy decision by an entity. It has to be decided in the light of organisational objectives, trade policies and financial (cost-benefit) considerations. There is not set rules for deciding the level of investment in working capital. Some organisations due to its peculiarity require more investment than others. For example, an infrastructure development company requires more investment in its working capital as there may be huge inventory in the form of work in process on the other hand a company which is engaged in fast food business, comparatively requires less investment. Hence, level of investment depends on the various factors listed below:
(a) Nature of Industry: Construction companies, breweries etc. requires large investment in working capital due long gestation period.
(b) Types of products: Consumer durable has large inventory as compared to perishable products.
(c) Manufacturing Vs Trading Vs Service: A manufacturing entity has to maintain three levels of inventory i.e. raw material, work-in-process and finished goods whereas a trading and a service entity has to maintain inventory only in the form of trading stock and consumables respectively.
(d) Volume of sales: Where the sales are high, there is a possibility of high receivables as well.
(e) Credit policy: An entity whose credit policy is liberal has not only high level of receivables but requires more capital to fund raw material purchases.
(a) Nature of Industry: Construction companies, breweries etc. requires large investment in working capital due long gestation period.
(b) Types of products: Consumer durable has large inventory as compared to perishable products.
(c) Manufacturing Vs Trading Vs Service: A manufacturing entity has to maintain three levels of inventory i.e. raw material, work-in-process and finished goods whereas a trading and a service entity has to maintain inventory only in the form of trading stock and consumables respectively.
(d) Volume of sales: Where the sales are high, there is a possibility of high receivables as well.
(e) Credit policy: An entity whose credit policy is liberal has not only high level of receivables but requires more capital to fund raw material purchases.
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