Which of the following statement is TRUE regarding factors affecting working capital Requirements?

Other factors remaining same Trading Business requires less working capital than Manufacturing Business

The correct answer is option (1)- Other factors remaining same Trading Business requires less working capital than Manufacturing Business.

1. Other factors remaining same Trading Business requires less working capital than Manufacturing Business- This is true. The basic nature of a business influences the amount of working capital required. A trading organisation usually needs a smaller amount of working capital compared to a manufacturing organisation. This is because there is usually no processing. Therefore, there is no distinction between raw materials and finished goods. Sales can be effected immediately upon the receipt of materials, sometimes even before that. In a manufacturing business, however, raw material needs to be converted into finished goods before any sales become possible. Other factors remaining the same, a trading business requires less working capital. Similarly, service industries which usually do not have to maintain inventory require less working capital.

2. The organizations which operate on a higher scale require less working capital- This is false. For organisations which operate on a higher scale of operation, the quantum of inventory and debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale.

3. In case of boom, lesser working capital is required- This is false. 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.

4. A liberal credit policy requires less amount of working capital- This is false. 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.