What do you mean by Working capital? Explain any four factors affecting the requirement of working capital.

Working capital refers to the amount which is invested in current assets. This fund also needed for payment of daily expenses, payment of current liabilities etc. this investment facilitates smooth business operation.

Factors affecting the requirement of working capital:

1. Nature of Business: The requirement of working capital depends on the nature of business. Manufacturing business requires more amount of working capital because it takes a lot of time in converting raw materials into finished goods while trading business requires less amount of working capital.
2. Scale of Operation: Business operating on a larger scale requires more funds to maintain the high quantum of inventory, debtors or meet day to day expenses as compared to small-scale business.
3. Business Cycle: Different phases of business cycle affect the requirement of working capital by a firm. In case of boom, there is an increase in production and scales leading to the increased requirement for working capital whereas the requirements for working capital reduce during depression.
   4. Seasonal Factors: Many businesses may have high level of activity during specific period of time which may be referred as seasonal time. Therefore, during peak season the level of activity is high leading to increased need of working capital as compared to the capital during lean period.