The factors affecting the Working Capital Requirements are:
A. Credit allowed
B. Financing alternatives
C. Cost of equity
D. Operating efficiency
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (A) and (D) only
Working capital is the money a business needs for its day-to-day operations: current assets less current liabilities.
(A) Credit allowed — Correct. When a firm sells on liberal credit, more money is locked up in debtors, so it needs more working capital.
(B) Financing alternatives — Incorrect. This is a factor affecting fixed capital. If assets such as machinery can be taken on lease, less money needs to be invested in them.
(C) Cost of equity — Incorrect. This is a factor affecting the choice of capital structure. It is the return shareholders expect on their money.
(D) Operating efficiency — Correct. A firm that manages its cash, stock and debtors efficiently turns them over faster, so it needs less working capital.
NCERT (2026-27 Edition): “Factors Affecting the Working Capital Requirements … 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.” “8. Operating Efficiency: Firms manage their operations with varied degrees of efficiency. For example, a firm managing its raw materials efficiently may be able to manage with a smaller balance. …” “Financing Alternatives: A developed financial market may provide leasing facilities as an alternative to outright purchase. …” “Cost of Equity: Stock owners expect a rate of return from the equity which is commensurate with the risk they are assuming. …” |