Which of the following is NOT a factor affecting working capital requirements?
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → Floatation Cost
Working capital is the money needed for day-to-day work, such as raw materials, stock and wages.
Option (1) Production Cycle — A factor of working capital (Incorrect). It is the time from getting raw material to making finished goods. A longer cycle needs more working capital.
Option (2) Inflation — A factor of working capital (Incorrect). When prices rise, more money is needed even for the same level of production and sales.
Option (3) Growth Prospects — A factor of working capital (Incorrect). A firm that expects to grow needs more working capital to meet higher production and sales targets.
Option (4) Floatation Cost — Not a factor of working capital (Correct). Floatation cost is the cost of raising funds, for example the cost of a public issue of shares. It is a factor affecting the choice of capital structure (debt or equity), not working capital.
NCERT (2026-27 Edition): “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.” “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.” “Inflation: With rising prices, larger amounts are required even to maintain a constant volume of production and sales. The working capital requirement of a business thus, become higher with higher rate of inflation. …” “Floatation Costs: Process of raising resources also involves some cost. Public issue of shares and debentures requires considerable expenditure. Getting a loan from a financial institution may not cost so much. These considerations may also affect the choice between debt and equity and hence the capital structure.” |