A slowdown spreads across the whole economy for two years. All through this period, the sales as well as the production of Kiran Motors stay small.
Which factor affecting the working capital requirement is at work here, and how does the requirement change?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Business cycle - the requirement falls
Option (1) Seasonal factors - the requirement falls — Incorrect. Seasonal factors are the peak and lean seasons within a year. A slowdown across the whole economy for two years is a phase of the business cycle.
Option (2) Business cycle - the requirement rises — Incorrect. The factor is right, but the direction is reversed. Working capital rises in a boom, when sales and production are large.
Option (3) Seasonal factors - the requirement rises — Incorrect. Both parts are wrong. A peak season raises the need, but this is an economy-wide slowdown, not a season.
Option (4) Business cycle - the requirement falls — Correct. A slowdown across the economy is the depression phase of the business cycle. Sales and production stay small, so the working capital requirement is lower.
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.” “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.” |