question_answer

In the backdrop of growing crimes against women, Sudhakar has just floated a private company by the name of 'Suraksha' to provide female bodyguards for women, while travelling or commuting between work and home. Being new to business, he appointed Mr Bokade as his finance manager and asked him to assess the finance needs of his company.

(i) In which two categories, the finance needs of a firm can be categorised into?

(ii) Explain any four factors that Mr Bokade have to consider while determining the working capital requirement for the company.

Answer:

(i) The finance needs of a business can be categorised into following two categories: [a] Fixed capital needs [b] Working capital needs (ii) The main factors that Mr Bokade have to consider while determining the working capital requirement of a company are: (any four) [a] Nature of Business The basic nature of a business influences the amount of working capital. A trading organisation and a service industry firm usually needs a smaller amount of working capital as compared to a manufacturing organisation. [b] Scale of Operations Organisations which operate on a large scale, their quantum of inventory and debtors required is generally high. Such organisations, therefore, require large amount of working capital as compared to the organisations which operate on a lower scale. [c] 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, since the sales as well as production will be less. [d] Seasonal Factors Some of the businesses have seasonal operations. During peak season, larger amount of working capital is required because of higher level of activity. As against this, the level of activity as well as the requirement for working capital will be lower during the lean season. [e] 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 length of production cycle affect the amount of funds required for raw materials and expenses.