Question
How does ‘Inflation’ affect the working capital requirements of a company? State.
Solution
Inflation is a situation of sustained increase in the general price level of goods and services. In such a situation, the working capital required to maintain a normal level of production and sale also increases. Inflation leads to increase in the cost of raw material, rise in wage rate, and rise in all other expenses and thus lead to a need for more working capital. The working capital requirement of a business thus, become higher with higher rate of inflation.
