Consider the following statements about the factors affecting the working capital requirement:
(A) To the extent a firm avails credit on its purchases, its working capital requirement increases.
(B) In case of a boom, the sales as well as production are likely to be larger, so a larger amount of working capital is required.
(C) The working capital requirement is higher in firms with a shorter processing cycle.
(D) A liberal credit policy results in a higher amount of debtors, increasing the requirement of working capital.
Which of the statements given above are correct?
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (B) and (D) only
(A) To the extent a firm avails credit on its purchases, its working capital requirement increases. — Incorrect. Credit availed means the supplier waits for payment. To that extent the working capital requirement is reduced.
(B) In case of a boom, the sales as well as production are likely to be larger, so a larger amount of working capital is required. — Correct. In a boom, more is produced and sold. So more stock and debtors must be financed.
(C) The working capital requirement is higher in firms with a shorter processing cycle. — Incorrect. A longer processing cycle ties up funds in raw material and expenses for longer. So the need is higher with a longer cycle and lower with a shorter one.
(D) A liberal credit policy results in a higher amount of debtors, increasing the requirement of working capital. — Correct. Under liberal credit, customers pay later. So more money is locked up in debtors.
Credit allowed is given to customers and raises the need. Credit availed is taken from suppliers and lowers it.
NCERT (2026-27 Edition): “3. Business Cycle: Different phases of business cycles affect the requirement of working capital by a firm. In case of a boom, the sales as well as production are likely to be larger and, therefore, 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.” “5. Production Cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Some businesses have a longer production cycle while some have a shorter one. Duration and the length of production cycle, affects the amount of funds required for raw materials and expenses. Consequently, working capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle.” “6. Credit Allowed: Different firms allow different credit terms to their customers. These depend upon the level of competition that a firm faces as well as the credit worthiness of their clientele. A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital. |