The factors affecting the working capital requirement of a business are as follows:
a. Nature of Business: The basic nature of business influences the amount of working capital required. A trading organization usually needs a smaller amount of working capital compared to a manufacturing organization. Similarly, service industries which usually do not have to maintain inventory require less working capital.
b. Scale of Operations: for organizations which operate on a higher scale of operation, the quantum of inventory and debtors required is generally high. Such organizations, therefore, require large amount of working capital as compared to the organizations 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 and production are likely to be larger and therefore larger amount of working capital is required. Working capital requirement will be less during the period of depression as the sales and production will be small.
d. Seasonal Factors: Most business have some seasonality in their operations. In peak season, because of higher level of activity, larger amount of working capital is required. When the level of activity is less, working capital requirement will be less.