Under credit allowed as a factor affecting the working capital requirement, the credit terms that a firm gives to its customers depend upon the __________ that it faces as well as the credit worthiness of its clientele.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → level of competition
Option (1) level of competition — Correct. When rivals give liberal credit, a firm has to do the same to keep its customers. So credit terms depend on the competition and on how far the customers can be trusted to pay.
Option (2) phase of the business cycle — Incorrect. The business cycle changes working capital through larger or smaller sales in a boom or a depression. It does not decide the credit terms a firm gives its customers.
Option (3) rate of inflation — Incorrect. Inflation means rising prices. It raises the money needed to keep the same volume of production and sales. It does not decide how much credit a firm gives its customers.
Option (4) length of the production cycle — Incorrect. The production cycle is the time from receiving raw material to making finished goods. A longer cycle needs more funds for materials and expenses. It concerns the time goods take to make.
NCERT (2026-27 Edition): “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.” “11. Level of Competition: Higher level of competitiveness may necessitate larger stocks of finished goods to meet urgent orders from customers. This increases the working capital requirement. Competition may also force the firm to extend liberal credit terms discussed earlier.” |