Many new rivals have entered the market of Dev Ltd. To meet urgent orders from customers, it now keeps larger stocks of finished goods.
Which factor affecting the working capital requirement is shown here?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Level of competition
Option (1) Operating efficiency — Incorrect. Operating efficiency means managing raw materials, debtors and finished goods well. Such efficiency lowers the working capital a firm needs. Dev Ltd. keeps more stock, not less, and the cause is the entry of new rivals.
Option (2) Seasonal factors — Incorrect. In the peak season a firm is busier and needs more working capital; in the lean season it needs less. The larger stocks at Dev Ltd. follow the entry of new rivals, with no season involved.
Option (3) Production cycle — Incorrect. The production cycle is the time between the receipt of raw material and its conversion into finished goods. A longer cycle needs more working capital, but the case says nothing about the time taken to produce.
Option (4) Level of competition — Correct. When competition is higher, a firm may keep larger stocks of finished goods to meet urgent orders. Many new rivals have entered Dev Ltd.’s market, so it keeps more stock and its working capital requirement rises.
NCERT (2026-27 Edition): “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.” “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. This is reflected in a higher inventory turnover ratio. Similarly, a better debtors turnover ratio may be achieved reducing the amount tied up in receivables. Better sales effort may reduce the average time for which finished goods inventory is held. Such efficiencies may reduce the level of raw materials, finished goods and debtors resulting in lower requirement of working capital.” |