Published on Sept 19, 2022Updated on Jul 16, 2026
Working capital is the financial backbone of a business, ensuring seamless day-to-day operations. The factors determining working capital can significantly influence a company's liquidity, operational efficiency, and overall financial health.
From sales volume and credit policies to inventory management and business size, there are several determinants of working capital that impact a business's cash flow and short-term obligations. Additionally, external factors like seasonality and economic conditions further shape a company's capital needs.
A thorough understanding of these factors affecting working capital requirements can help businesses optimise their financial resources, enhance stability, and drive sustainable growth.
The amount of working capital can make or break a business. It is essential to an enterprise like oxygen is to the body. A company can make do without profits but can only sustain itself for a short time with this approach. Working capital is the difference between what a business currently owns and owes. It is calculated with the following formula:
Working Capital = Current Assets – Current Liabilities
Estimating working capital requirements is essential in projecting an accurate amount. With a working capital loan, businesses can finance their short-term needs and expenses like raw materials, payments, bills, salaries, taxes, etc. This ensures streamlined operations for the coming months or financial year.
Every business enterprise, irrespective of its size, requires adequate working capital to keep running day-to-day operations smoothly. Lower working capital always results in lower business efficiency and market competitiveness. Many business enterprises fail in the market due to poor working capital management.
There are multiple factors determining working capital requirements in a business, and they vary from business to business. The following are the top eight factors affecting working capital that are common in every business:
For any business, the size of the sale matters. To have a higher sales number, the business needs to maintain higher current assets in the form of inventory and cash at hand to sustain the operations and fulfil demand. Therefore, a business with a higher sales number requires higher regular working capital compared to a business with a lower sales turnover.
The operating cycle refers to the number of days it requires to acquire inventory, sell the inventory, and collect cash from the sale of inventory. A business with a longer operating cycle will have higher working capital requirements compared to a shorter operating cycle. For example, a chip manufacturer will have a shorter operating cycle compared to a real estate developer.
The working capital requirement also depends on the inventory management policy of the company. For example, if a company wants to stock all the raw materials before starting production, the working capital requirement will be very high as resources will get stuck until the operating cycle is completed. But, if the company follows the Just in Time (JIT) inventory management policy, where materials are sourced just before the need arises, the working capital requirement will be much lower.
The working capital requirements go up with the growth in the size of the business and scale of operations. A company that operates on a large scale with multiple manufacturing units spread across different regions will have higher working capital needs but will have better economics due to better bargaining power compared to small business units.
The credit policy also dictates the working capital requirements of the business. A small business has to depend on deferred payments to drive sales and secure business orders. In case of missed payments from clients, it hurts the working capital requirements. Also, if you have raised any working capital loan in the past or have any short-term liabilities, its repayment will add to the working capital costs.
Naturally, in such a case working capital requirements will be higher. If supplies of raw materials are available on favourable terms and there are timely payments from clients, the requirement for working capital will be much less.
Many businesses don’t generate enough sales throughout the year and are only season-specific. For example, businesses dealing in woollen garments, the tourism industry, seasonal fruits exporters, etc. Such businesses experience a quick upsurge in sales that lasts a few weeks to months. During such a period, the business will require higher working capital requirements compared to the rest of the year to ensure competitiveness in the market.
The nature of production technology incorporated in plants also impacts working capital needs. For example, if a plant uses a labour-intensive manufacturing process, the cost of wages will be higher compared to those plants that use automated production processes. A plant with an automated production process will require fewer workers, therefore the expenses like wages will be lower and there will be less wastage of resources, resulting in lower working capital requirements.
Risks in business also impact operational efficiency and working capital needs. Factors like inflation, and reduced demand due to changing trends in the market, impact the working capital requirements. All such factors increase the working capital requirement and the business needs to increase the contingency provisions to keep the business operations running.
By effectively managing working capital, businesses can ensure financial stability, maintain operational efficiency, and position themselves for sustainable growth. Let’s explore why understanding working capital requirements is crucial for every business:
While the application process may vary slightly for different lending institutions, most of them follow the guidelines below:
Depending on the nature of the business and other factors, the working capital requirements keep on changing. Therefore, the business needs a robust working capital management strategy so that the company operates efficiently using its current assets and current liabilities.
If there are any shortages, you can consider applying for a working capital loan with your lender. It will help you to maintain accounts payable, make short-term inventory purchases, and meet other short-term financial requirements.
Before applying for a working capital loan, check your eligibility using the business loan eligibility calculator to have an improved chance of loan approval. Also, you can use the business loan calculator to know the repayment structure and plan the size of the total working capital loan you can afford as per your business financials and cash flow.
* Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG India Credit. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG India Credit's policy at the time of loan application. If you wish to know more about our products and services, please contact us
Working capital involves four crucial aspects. These include:
There are two types of working capital types: permanent and temporary. Other subtypes include:
Estimating working capital requirements is essential because it helps business owners to:
A working capital study helps assess an organisation's present assets and liabilities to cater to its short-term financial needs. It helps a company prepare for unforeseen events and develop strategies to tackle them.
Was this helpful?
