A firm needs a smaller amount of working capital in the lean season than in the peak season. What is the cause of this?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → The level of activity of the firm is lower.
Option (1) The firm gets more credit on its purchases from suppliers. — Incorrect. Credit from suppliers is the factor credit availed. It does lower working capital, but it depends on the terms suppliers give, and the season does not change them.
Option (2) The level of activity of the firm is lower. — Correct. This is the factor seasonal factors. In the peak season the level of activity is high, so more working capital is needed. In the lean season the level of activity is lower, and so is the need for working capital.
Option (3) The production cycle of the firm becomes shorter. — Incorrect. Production cycle is the time taken to turn raw material into finished goods. A shorter cycle does lower working capital, but it is a separate factor, and the season does not shorten it.
Option (4) The firm allows less credit to its customers. — Incorrect. Credit given to customers is the factor credit allowed. Less credit means fewer debtors, but it is a matter of credit policy, and the season does not decide it.
NCERT (2026-27 Edition): “4. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, larger amount of working capital is required. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season.” “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.” “7. Credit Availed: Just as a firm allows credit to its customers it also may get credit from its suppliers. To the extent it avails the credit on purchases, the working capital requirement is reduced.” |