Question

Neelabh is engaged in ‘Transport Business’ and transports fruits and vegetables to different states. Stating the reason in support of your answer, identify the working capital requirements of Neelabh. Neelabh also wants to expand and diversify his transport business, explain any two factors that will affect his fixed capital requirements. 

Answer 1

The working capital requirement would be less as he is engaged in ‘Service Industry’. As service firm needs less working capital because it sells more on cash basis and do not have to maintain inventory. Working capital requirement would be for the payment of salary, fuel charges, maintenance vehicles, etc. Factors which will affect his Fixed Capital requirement are: 

i. Scale of Operations: A larger organization operating at a higher scale needs bigger plant, more space etc and therefore, requires bigger investment in fixed assets when compared with the small organizations. 

ii. Diversification: 

a. A firm may choose to diversify its operations for various reasons. 

b. With diversification, fixed capital requirements increase, example a textile company is diversifying and starting a cement manufacturing plant. Obviously its investment in fixed capital will increase.