Which of the following will NOT increase the working capital requirement of a firm?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → A depression phase of the business cycle
Option (1) Higher growth prospects of the firm — Increases the requirement. A firm with high growth potential needs more working capital, so that it can meet higher production and sales targets whenever required.
Option (2) A longer production cycle — Increases the requirement. Production cycle is the time between receiving raw material and turning it into finished goods. A longer cycle keeps more funds in raw materials and expenses, so the working capital requirement is higher.
Option (3) A depression phase of the business cycle — Does not increase the requirement. In a depression, sales and production are small. So the firm needs less working capital, and the requirement falls.
Option (4) A more liberal credit policy towards customers — Increases the requirement. A liberal credit policy lets customers pay later. This raises the amount of debtors, so more working capital is needed.
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.” “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.” “10. Growth Prospects: If the growth potential of a concern is perceived to be higher, it will require larger amount of working capital so that it is able to meet higher production and sales target whenever required.” |