Published on Sept 19, 2022Updated on Sept 23, 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.
Important Note: This article is for general informational purposes only and may be subject to change from time to time. As product features, eligibility criteria, interest rates, charges, fees, tenures and other terms may be revised as per SMFG India Credit's policies, readers are advised to refer to the latest details from the respective product pages (please select from the top menu). For the latest loan charges, please visit Charges & Fees Link and for the latest Interest rates, please visit Interest Rate Rationale. Please note that final loan terms, disbursement process and eligibility criteria will depend on SMFG India Credit's policies at the time of loan application.
The content of this article is for information purposes only and does not constitute as, an offer or advise to avail any products or services from, or, a commitment to grant any loan by the company. It is not intended to create any rights or obligations against us. All content is provided "as is" without any warranty of any kind, either express or implied & we disclaim any warranty or representation, whatsoever, in regards to the content. Please refer to the Privacy Policy of the company to understand the use, processing and storage of your personal data.
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?
Insurance disclaimer SMICC is registered with the Insurance Regulatory and Development Authority of India (IRDAI) as a Corporate Agent. IRDAI Registration No.: [CA0098] CIN No. U65191TN1994PLC079235. The insurance policy is a contract between the customer and the insurance company, and policy is underwritten by insurance companies. SMICC acts only as the distributor and is not responsible for any risk, policy issuance, claim settlement/repudiation etc. Insurance is the subject matter of solicitation. Purchase of insurance is voluntary and subject to insurer underwriting and policy terms and conditions. Customers are advised to read the policy terms and conditions, benefits, exclusions, claim settlement carefully before purchase. Kindly note that “Insurance Products” are not mandatory for the purpose of the application and disbursement of loan. It shall be the sole discretion of the customer, by providing explicit consent, to avail such insurance along with the Loan.
Beware of Spurious calls/ Fraud phone calls IRDAI is not involved in activities like selling Insurance policies, announcing bonus or investment of premium. Public receiving such phone calls are requested to lodge a police complaint.
