6 .Diversification: A firm may choose to diversify its operations for various reasons, With diversification, fixed capital requirements increases. 7. Financing Alternatives: A developed financial market may provide leasing facilities as an alternative to outright purchase. Availability of leasing facilities, thus, may reduce the required to be invested in fixed assets, thereby reducing the fixed capital requirements. Such a strategy is specially suitable in high risk lines of business. 8. of Collaboration: At times, certain business organisations share each other’s facilities. For example, a bank may use another’s ATM or some of them may jointly establish a particular facility. Such collaboration reduces the level of investment in fixed assets for each one of the participating organisations. WORKING CAPITAL REQUIREMENTS Net working capital may be defined as the excess of current assets over current liabilities. FACTORS AFFECTING WORKING CAPITAL REQUIREMENTS 1. Nature of Business: Trading Organisations Less working capital – Manufacturing Organisations more working capital – 2. Scale of Operations: Large scale organizations more working capital – Small scale organizations less working capital – 3. Business Cycle: Boom period - more working capita Depression period - less working capital 4. Seasonal factors: Peak season more working capital – Lean season less working capital – 5. Production cycle: Longer production cycle more working capital – Shorter production cycle less working capital – 6. Credit allowed: Conservative/strict credit policy less working capital – Liberal credit policy more working capital – 7. Credit availed: If credit is available easily from suppliers - less working capital If credit is not available easily from suppliers more working capital – 8. Operating efficiency: If current assets are managed efficiently less working capital – If current assets are not managed efficiently more working capital – 9. Availability of Raw Material: Easy and timely availability of raw material less working capital – Difficulty and lengthy time period are involved in getting raw materials more working capital – 10. Growth Prospects: If there is possibility of growth potential - more working capital
6 .Diversification: A firm may choose to diversify its operations for various reasons, With diversification, fixed capital requirements increases. 7. Financing Alternatives: A developed financial market may provide leasing facilities as an alternative to outright purchase. Availability of leasing facilities, thus, may reduce the required to be invested in fixed assets, thereby reducing the fixed capital requirements. Such a strategy is specially suitable in high risk lines of business. 8. of Collaboration: At times, certain business organisations share each other’s facilities. For example, a bank may use another’s ATM or some of them may jointly establish a particular facility. Such collaboration reduces the level of investment in fixed assets for each one of the participating organisations. WORKING CAPITAL REQUIREMENTS Net working capital may be defined as the excess of current assets over current liabilities. FACTORS AFFECTING WORKING CAPITAL REQUIREMENTS 1. Nature of Business: Trading Organisations – Less working capital Manufacturing Organisations – more working capital 2. Scale of Operations: Large scale organizations – more working capital Small scale organizations – less working capital 3. Business Cycle: Boom period - more working capita Depression period - less working capital 4. Seasonal factors: Peak season – more working capital Lean season – less working capital 5. Production cycle: Longer production cycle – more working capital Shorter production cycle – less working capital 6. Credit allowed: Conservative/strict credit policy – less working capital Liberal credit policy – more working capital 7. Credit availed: If credit is available easily from suppliers - less working capital If credit is not available easily from suppliers – more working capital 8. Operating efficiency: If current assets are managed efficiently – less working capital If current assets are not managed efficiently – more working capital 9. Availability of Raw Material: Easy and timely availability of raw material – less working capital Difficulty and lengthy time period are involved in getting raw materials – more working capital 10. Growth Prospects: If there is possibility of growth potential - more working capital
business-studies-xii1.docx