Explore topic-wise InterviewSolutions in .

Decisions related to investment:

Business requires capital investment in various assets that too for a long and fixed term. This includes investment in machinery, land, etc. It is always a risky and tricky task for the financial manager to identify the best asset in which investment should be made. Hence it is very crucial that decision of investment is evaluated in terms of expected return and risk.

Investment decision is called capital budgeting. There are several methods of capital budgeting brought in use by the finance manager for deciding the investment decision to be taken for the company. Few of these methods are pay-back method, rate of return method, discounted cash flow method, etc.

Decisions related to dividend: Dividend is a part of profit of a company which is distributed among its shareholders. Dividend is a return to shareholders on their investment. The financial manager has to tactfully decide what part of profit should be distributed as dividend and what part of profit should be retained in business.

• Dividend is a part of profit of a company which is distributed among its shareholders. Dividend is a return to shareholders on their investment.
• As per the Companies Act, dividends can be paid in cash or cheque on paid-up capital of share. The finance manager has to tactfully decide what part of profit should be distributed as dividend and what part of profit should be retained in business. Retained earnings in business are an important internal source of finance.
• Payment of dividend affects the market value of share of the company. If a major portion of profit is distributed as dividend, it decreases the ploughing back of profit. On the other hand, if a major portion of profit is reinvested then less amount is left for distributing dividend.

Factors affecting dividend:

• Divisible profit of the company during the current financial year
• Estimation of income in future
• Rate of dividend paid by the company in the past years
• Need of ploughing back of profit in business
• Financial condition and financial needs of company at present
• Ratio of reserves with company
• Future planning of profitable investment
• Attitude of directors of company
• Taxation policy
• Legal restrictions
• Expectation of shareholders of the company
• Condition of capital market
• Growth rate of company
• Liquidity position of the company

Capital Structure:

Capital structure refers to the mix between owners funds and borrowed funds. Owners fund consists of equity share capital, preference share capital and reserves and surpluses or retained earnings. Borrowed funds can be in the form of loans, debentures, public deposits, etc.

A capital structure will be said to be optimal when . the proportion of debt and equity is such that it results in an increase in the value of the equity share.

Factors Affecting Capital Structure: 

1. Trading on Equity (Financial Leverage):

It refers to the use of fixed income securities such as debentures and preference capital in the capital structure so as to increase the return of equity shareholders. 

2. Stability of Earnings:

If the company is earning regular and reasonable income, the management can rely on preference shares or debentures. Otherwise issue of equity shares is recommended.

3. Cost of Debt: 

A  firm’s ability to borrow at lower rate, increases its capacity to employ higher debt. 

4. Interest Coverage Ratio (ICR):

The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. Higher the ratio, better is the position of the firm to raise debt.

5. Desire for control:

If the management has a desire to control the business, it will prefer preference shares and debentures in capital structure because they have no voting rights.

6. Flexibility:

Capital structure should be capable of being adjusted according to the needs of changing conditions.

7. Capital Market Conditions:

In depression, debentures are considered good. In a booming situation, issue of shares will be more preferable.

8. Period of Finance:

If funds are required for short period, borrowing from bank should be preferred. If funds are required for longer period company can issue shares and debentures.

9. Taxation Policy:

interest on loan and debentures is deductible item under the Income Tax Act whereas dividend is not deductible. In order to take advantage of this provision, companies may issue debentures. 

10. Legal Requirements:

The structure of capital of a company is also influenced by the statutory requirements. For example, Banking Regulation Act, Indian Companies Act, SEBI, etc.

1. Financial Planning: 

The process of estimating the fund requirement of a business and specifying the sources of funds is called financial planning. It ensures that enough funds are available at right time.

The twin objectives of financial planning are: 

• To ensure availability of fund at the right time and its possible sources.
• To see that rm does not raise fund unnecessarily.

2. Importance of Financial Planning

• It ensures adequate funds from various sources.
• It reduces the uncertainty about the availability of funds.
• It integrates financial policies and procedures.
• It helps the management to eliminate waste of funds and reduce cost.
• It helps to achieve a balance between the inflow and outflow of funds and ensure liquidity.
• It serves as the basis of financial control
• It helps to reduce cost of financing to the minimum.
• It helps to ensure stability and protability of business.
• It makes the rm better prepared to face the future.

Correct option is (B) Blood

(i) Fixed Capital:

Fixed capital refers to the capital needed for the the acquisition of fixed assets to be used fora longer period.

(ii) Factors affecting Fixed Capital 

(1) Nature of Business :

A trading concern needs lower investment in fixed assets compared with a manufacturing organization.

(2) Scale of Operations:

An organisation operating on large scale require more fixed capital as compared to an organisation operating on small scale. 

(3) Choice of Technique :

A capital intensive organisation requires more amount of fixed capital than labour intensive organisations. 

(4) Technology Upgradation :

Organisations using assets which become obsolete faster require more fixed capital as compared to other organisations. 

(5) Growth Prospects :

Higher growth of an organisation generally requires higher investment in fixed assets. 

(6) Diversification :

The firms dealing in number of products (Diversification) requires more investment in fixed capital. 

(7) Use of Fixed Assets:

Companies acquiring fixed assets on hire purchase or lease system require lesser amount as against cash purchases.

Decisions related to investment:

• Business requires capital investment in various assets that too for a long and fixed term. This includes investment in machinery, land, etc.
• It is always a risky and tricky task for the financial manager to identify the best asset in which investment should be made. Hence it is very crucial that decision of investment is evaluated in terms of expected return and risk.
• Investment decision is called capital budgeting. There are several methods of capital budgeting brought in use by the finance manager for deciding the investment decision to be taken for the company. Few of these methods are pay-back method, rate of return method, discounted cash flow method, etc.

Factors affecting investment decision:

• Need of total capital
• Estimated rate of return and profitability from investment
• Estimated net cash receivable from investment
• Element of risk involved in investment
• Requirement of working capital after investment
• Useful economic life of investment and its estimated life
• Significance of investment
• Capital rationing
• Certainty or uncertainty of earning in future

1. Investment Decision: It refers to the selection of assets in which funds will be invested by the business. Assets which are obtained by the business are of two types, i.e., long-term assets and short-term assets. On this basis, investment decision is also divided into two parts:

i. Long-term Investment Decision: This is referred to as the Capital Budgeting Decision. It relates to the investment in long-term assets. For example, buying a new machine. For the same purpose, the finance manager has to make a comparative study of various alternatives available in the market on the basis of their cost and profitability. These decisions are very important as they affect the earning of the business over the long run.

ii. Short-term Investment Decision: This is referred to as the Working Capital Management. It relates to the investment in short-term assets, such as, cash, stock, debtors, etc. Finance manager has to ensure that there is sufficient investment in these assets as they affect the liquidity position of the business. For the same purpose, the relative profitability and liquidity of these assets are compared.

2. Financing Decision: It refers to the determination as to how the total funds required by the business will be obtained from various long-term sources. Long term financial sources chiefly include equity share capital, preference share capital, retained earning, debenture, long-term loan, etc.

Financial management is concerned with the’ solution of three major issues relating to the financial operations of a firm corresponding to the three questions of Investment, Financing and Dividend decision. In a financial context, it means the selection of best financing alternative or best investment alternative. 

The finance function, therefore, is concerned with three broad decisions which are as follows:

1. Investment Decision: The investment decision relates to how the firm’s funds are invested in different assets. 

2. Financing Decisions: This decision is about the quantum of finance to be raised from various long term sources and short term sources. It involves identification of various available sources of finance. 

3. Dividend Decision: This decision relates to distribution of dividends. Dividend is the portion of profit which is distributed to shareholders. The decision involved here is how much of the profit earned by company is to be distributed to the shareholders and how much of it should be retained in the business for meeting investment requirements

Capital budgeting

Total current assets

Capital Structure :

Capital structure refers to the mix between owners funds and borrowed funds. Owners fund consists of equity share capital, preference share capital and reserves and surpluses or retained earnings. Borrowed funds can be in the form of loans, debentures, public deposits, etc. A capital structure will be said to be optimal when . the proportion of debt and equity is such that it results in an increase in the value of the equity share.

Factors Affecting Capital Structure 

(1) Trading on Equity (Financial Leverage) :

It refers to the use of fixed income securities such as debentures and preference capital in the capital structure so as to increase the return of equity shareholders.

(2) Stability of Earnings:

If the company is earning regular and reasonable income, the management can rely on preference shares or debentures. Other wise issue of equity shares is recommended.

(3) Cost of Debt: A firm’s ability to borrow at lower rate, increases its capacity to employ higher debt. 

(4) Interest Coverage Ratio (ICR) :

The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. Higher the ratio, better is the position of the firm to raise debt. 

(5) Desire for control :

If the management has a desire to control the business, it will prefer preference shares and debentures in capital structure because they have no voting rights. 

(6) Flexibility:

Capital structure should be capable of being adjusted according to the needs of changing conditions.

(7) Capital Market Conditions :

In depression, debentures are considered good. In a booming situation, issue of shares will be more preferable.

(8) Period of Finance:

If funds are required for short period, borrowing from bank should be preferred. If funds are required for longer period company can issue shares and debentures. 

(9) Taxation Policy :

interest on loan and debentures is deductible item under the Income Tax Act whereas dividend is not deductible. In order to take advantage of this provision, companies may issue debentures.

(10) Legal Requirements :

The structure of capital of a company is also influenced by the statutory requirements.

For example, Banking Regulation Act, Indian Companies Act, SEBI, etc.

• The financial manager studies the position of working capital and fixed capital thoroughly. He also studies the factors that affect these capitals.
• After studying the requirement the manager has to study the various sources of finance such as equity shares, preference shares, debentures, bank loan, etc. and prepare the right mix of finance sourcing.
• The task does not get over at just acquiring finance. The manager also needs to see that it is utilized and allocated properly. Failure to do so can lead to disaster or losing important capital raised for the business.

Wealth maximisation

1. Working Capital:

Working capital is that portion of capital required for investing in current assets for meeting day to day working of an organization. Current assets can be converted into cash within a period of one year. They provide liquidity to the business.

2. Working capital is of two types:

• Gross working capital = Total of current asset 
• Networking capital = Current assets – Current Liabilities

Factors affecting Working Capital:

1. Nature of Business: A trading organisation usually needs a smaller amount of working capital as compared to a manufacturing organisation. 

2. Scale of Operations: A large scale organisation requires large amount of working capital as compared to the organisations which operate on a lower scale.

3. Business Cycle: In the boom period larger amount of working capital is needed to meet the demand. In case of depression, demand for goods declines so less working capital is required.

4. Seasonal Factors: During peak season demand of a product will be high and thus high working capital will be required as compared to the lean season.

5. Production Cycle: Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Working capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle. 

6. Credit Policy: A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital.

7. Operating Efficiency: If cash, debtors and inventory are efficiently managed, working capital requirement can be reduced.

8. Availability of Raw Materials: If the raw materials are easily available in the market and there is no shortage, huge amount need not be blocked in inventories, so it needs less working capital.

Correct option is (D) Both (A) and (B)

Debt Reason: Due to weak cash flow position, the firm may not be able to honour fixed cash payment obligations.

Factors affecting Fixed Capital 

(1) Nature of Business :

A trading concern needs lower investment in fixed assets compared with a manufacturing organization.

(2) Scale of Operations:

An organisation operating on large scale require more fixed capital as compared to an organisation operating on small scale.

(3) Choice of Technique :

A capital-intensive organisation requires more amount of fixed capital than labour intensive organisations. 

(4) Technology Upgradation :

Organisations using assets which become obsolete faster require more fixed capital as compared to other organisations.

(5) Growth Prospects :

Higher growth of an organisation generally requires higher investment in fixed assets. 

(6) Diversification :

The firms dealing in number of products (Diversification) requires more investment in fixed capital. 

(7) Use of Fixed Assets:

Companies acquiring fixed assets on hire purchase or lease system require lesser amount as against cash purchases.

Working Capital:

Working capital is that portion of capital required for investing in current assets for meeting day to day working of an organization. Current assets can be converted into cash within a period of one year.

They provide liquidity to the business. Working capital is of two types: 

(1) Gross working capital = Total of current asset 

(2) Net working capital = Current assets – Current Liabilities

Factors affecting Working Capital 

(1) Nature of Business :

A trading organisation usually needs a smaller amount of working capital as compared to a manufacturing organisation.

(2) Scale of Operations:

A large scale organisation requires large amount of working capital as compared to the organisations which operate on a lower scale.

(3) Business Cycle :

In the boom period larger amount of working capital is needed to meet the demand. In case of depression, demand for goods declines so less working capital is required. 

(4) Seasonal Factors:

During peak season demand of a product will be high and thus high working capital will be required as compared to lean season.

(5) Production Cycle:

Production cycle is the time span between the receipt of raw material and their conversion into finished goods. Working capital requirement is higher in firms with longer processing cycle and lower in firms with shorter processing cycle.

(6) Credit Policy :

A liberal credit policy results in higher amount of debtors, increasing the requirement of working capital.

(7) Operating Efficiency :

If cash, debtors and inventory are efficiently managed, working capital requirement can be reduced. 

(8) Availability of Raw Materials :

If the raw materials are easily available in the market and there is no shortage, huge amount need not be blocked in inventories, so it needs less working capital.

Investment decisions, Finance decision and Dividend decision.

Capital Structure:

Capital structure refers to the mix between owners funds and borrowed funds. Owners fund consists of equity share capital, preference share capital and reserves and surpluses or retained earnings. Borrowed funds can be in the form of loans, debentures, public deposits, etc.

A capital structure will be said to be optimal when the proportion of debt and equity is such that it results in an increase in the value of the equity share.

Factors Aecting Capital Structure:

1. Trading on Equity (Financial Leverage):

It refers to the use of fixed income securities such as debentures and preference capital in the capital structure so as to increase the return of equity shareholders.

2. Stability of Earnings:

If the company is earning regular and reasonable income, the management can rely on preference shares or debentures. Otherwise issue of equity shares is recommended.

3. Cost of Debt:

A  firm’s ability to borrow at lower rate, increases its capacity to employ higher debt.

4. Interest Coverage Ratio (ICR):

The interest coverage ratio refers to the number of times earnings before interest and taxes of a company covers the interest obligation. Higher the ratio, better is the position of the firm to raise debt.

5. Desire for control:

If the management has a desire to control the business, it will prefer preference shares and debentures in capital structure because they have no voting rights.

6. Flexibility:

Capital structure should be capable of being adjusted according to the needs of changing conditions.

7. Capital Market Conditions: In depression, debentures are considered good. In a booming situation, issue of shares will be more preferable.

Financial planning

Correct option is (C) F. W. Paish

(c) Complaints

Long-term Investment Decision: This is referred to as the Capital Budgeting Decision. It relates to the investment in long-term assets. For example, buying a new machine. For the same purpose, the finance manager has to make a comparative study of various alternates available in the market on the basis of their cost and profitability. These decisions are very important as they affect the earning of the business over the long run.

Factors affecting Long-Term Investment Decision (Capital Budgeting Decision)

Following factors affect this decision:

i. Cash Flows of the Project: As we know investment decision (capital budgeting decision) is related with investment in long-term assets. These assets involve both cash outflows and cash inflows over a series of years. The amount needed for investment is known as cash outflow, on the other hand, returns from the same investment is known as cash inflows. Both of these need to be analyzed carefully before finalizing the investment.

ii. The Rate of Return: A project may not be profitable as compared to other. The criteria to decide the profitability of various projects is their respective rate of returns. The rate of return is calculated on the basis of expected return of the project and risk attached with it. If two projects are of the same risk class, the project having higher rate of return will be accepted.

Three major decisions are:

(i) Investment Decision: It relates to how the firm's funds are invested in different assets in the long-term and the short-term.

(ii) Financing Decision: It relates to the quantum of finance to be raised from various long-term sources. It determines the overall cost of capital and financial risk of the enterprise.

(iii) Dividend Decision: It relates to how much of the profit earned by the company (after paying tax) is to be distributed to the shareholders and how much of it should be retained in the business.

Three major decisions are:

(i) Investment Decision: It relates to how the firm's funds are invested in different assets in the long-term and the short-term.

(ii) Financing Decision: It relates to the quantum of finance to be raised from various long-term sources. It determines the overall cost of capital and financial risk of the enterprise.

(iii) Dividend Decision: It relates to how much of the profit earned by the company (after paying tax) is to be distributed to the shareholders and how much of it should be retained in the business.

1. Investment decision 

2. Dividend decision 

3. Finance decision

4. Finance decision

It is financial planning.

Importance: Main points of the importance of financial planning are as under:

i. Helps to Face the Eventualities: It tries to forecast various business situations. On this basis, alternative financial plans are prepared. By doing so, it helps to face the eventual situations in a better way.

ii. Helps in Avoiding Business Shocks and Surprises: Proper provision regarding shortage or surplus of funds is made by anticipating future receipts and payments. Hence, it helps in avoiding business shocks and surprises.

iii. Helps in Coordination: It helps in coordinating various business activities, such as, sales, purchase, production, finance, etc.

The three main financial decisions which are generally taken by a finance manager are as under:

i. Investment Decision: It refers to the selection of assets in which funds will be invested by the business. Assets which are obtained by the business are of two types, i.e., long-term assets and short-term assets. On this basis, investment decision is also divided into two parts:

a. Long-term Investment Decision: This is referred to as the Capital Budgeting Decision. It relates to the investment in long-term assets. For example, buying a new machine. For the same purpose, the finance manager has to make a comparative study of various alternates available in the market on the basis of their cost and profitability. These decisions are very important as they affect the earning of the business over the long run.

b. Short-term Investment Decision: This is referred to as the Working Capital Management. It relates to the investment in short-term assets, such as, cash, stock, debtors, etc. Finance manager has to ensure that there is sufficient investment in these assets as they affect the liquidity position of the business. For the same purpose, the relative profitability and liquidity of these assets are compared.

ii. Financing Decision: It refers to the determination as to how the total funds required by the business will be obtained from various long-term sources. Long-term financial sources chiefly include equity share capital, preference share capital, retained earnings, debentures, long-term loan, etc. For taking financing decision, an analysis of the cost and benefits of all the sources is made.

iii. Dividend Decision: It refers to the determination of how much part of the earning should be distributed among shareholders by the way of dividend and how much should be retained for meeting future needs as retained earnings.

With the help of this analysis it can be found out as to what will be the effect of various combinations of long-term financial sources on the EPS at a certain EBIT level.

The reason is that the payment of interest is considered an expense while preference dividend is the division of profit.

It may reduce its requirement of fixed capital as now less funds are required to be invested in fixed assets.

Cost of debt is lower than cost of equity but a company cannot come into existence without issuing shares.

It will increase the requirement of working capital.

Equity based capital structure can be easily raised when the stock market is bullish.

With rising prices larger amounts are required to maintain a constant volume of production and sales. Thus working capital requirement of a business will be high.

When the stock market is bearish, a company must go in for more of loans or debt in its capital structure.

Working capital requirement is higher in time with longer production cycle and lower in firms with shorter production cycle. 

If a business needs raw material that is available in limited quantity or whose supply is irregular or is available in certain season only, then such raw material need to be kept in stock for continuous production. Hence, the company needs more capital for production.

It will require large working capital due to long operating cycle.

More working capital will be needed as the company is required to produce more to meet the increasing demand.

Profit maximization focuses on earning huge profits whereas wealth maximization focuses on improving the value of the company shares in the market.

Objectives of financial management are: 

a. The primary aim of financial management is to maximize shareholder’s wealth which is referred to as wealth maximization concept: 

• Company funds belong to the shareholders and the manner in which they are invested and the return earned by them determines their market value or price. It means maximization of the market value of equity shares. 
• Market price of equity shares increase if the benefits from the decision exceed the cost involved. 
• Thus, we can say, the objective of financial management is to maximize the current price of equity shares of the company or to maximize the wealth of owners of the company, that is, the shareholders. 

b. Reducing the cost of funds procured 

c. Keeping the risk under control and achieving effective deployment of such funds. 

Importance of financial planning: 

a. It tries to forecast what may happen in the future under different business situations. 

b. In other words, it makes the firm better prepared to face the future 

c. It helps in avoiding business shocks and surprise and helps the company in preparing for the future. 

d. It helps in coordinating various business functions eg, sales and production functions, by providing clear policies and procedures. 

e. Detailed plans of actions prepared under financial planning reduce waste, duplication of efforts and gaps in planning. 

f. It tries to link the present with the future. 

g. It provides a link between investment and financing decisions on a continuous basis. 

h. By spelling out detailed objectives for various business segments. It makes the evaluation of actual performance easier. 

Factors which will affect capital structure of this company are: 

a. Cash flow position: 

Size of cash flows must be considered before issuing debt. 

Company must ensure that sufficient cash flows are expected to cover fixed cash payment obligations (interest payment and repayment of principle). 

b. Risk: 

The risk associated with different sources is different. Debt financing is risk prone source. 

• The financial risk depends upon the proportion of debt in total capital. 
• Debt is more riskier because of interest payment obligation attached. 

c. Floatation costs: Cost of raising funds is called floatation cost. Higher the floatation cost, less attractive the source. 

Factors affecting requirement of Fixed Capital 

a. Nature of the business: 

• The type of business has a bearing upon the fixed capital requirements. 
• For example, a trading concern needs lower investment in fixed assets compared with a manufacturing organization; since it does not require to purchase plant and machinery etc. 

b. Scale of operations: A larger organization operating at a higher scale needs bigger plant, more space, etc and therefore requires higher investment in fixed assets when compared with the small organization. 

c. Choice of technique: 

• Some organizations are capital intensive whereas others are labour intensive. 
• A capital-intensive organization requires higher investment in plant and machinery as it relies less on manual labour. The requirement of fixed capital for such organizations would be higher. 
• Labour-intensive organizations, on the other hand, require less investment in fixed assets. Hence, their fixed capital requirement is lower. 

Factors affecting requirement of Working Capital 

a. Scale of operations: 

• For organizations which operate on a higher scale of operation, the quantum of inventory, 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. 

b. Business cycle: 

• In case of a boom, the sales as well as production are likely to be higher and therefore higher amount of working capital is required. 
• As against this, the requirement of working capital will be lower during period of depression as the sales as well as production will be low. 

c. Seasonal factors: 

• In peak season, because of high level of activity higher amount of working capital is required. 
• As against this, the level of activity as well as the requirement for working capital will be lower during the lean season. 

The working capital requirement of 'India Logistics' will be low as it is in a service industry which usually do not have to maintain inventory.

Following are the factors affecting working capital of a company:

(i) Inflation: At a higher late of inflation, working capital requirement will also be higher.

(ii) Business cycle: During boom period, when sales are high, higher amount of working capital is required as compared to the depression period.

With diversification, the fixed capital requirements will increase as the investment in fired capital will increase.

The organisations which have sufficient possibilities of growth require more working capital, while the case is different in respect of companies with low growth prospects.

Working Capital means the portion of capital invested in short-term assets of a firm. It is the excess of current assets over current liabilities.

Factors which determine the working capital requirements are as follows:

(i) Length of Operating cycle/Production cycle: Operating cycle refers to the length of the manufacturing cycle, i.e., the periods taken to convert raw materials into finished products. Longer period means more working capital requirement and vice versa.

(ii) Credit policy/Credit allowed: If liberal credit terms are given and a liberal policy is followed, then the company would require more working capital as there is less cash inflow and vice versa.

(iii) Nature of business: Manufacturing firm requires higher amount of working capital as compared to a trading organisation, to convert raw materials into the finished goods.

(iv) Scale of operations: Large amount of working capital is required by firms operating on a large scale of operations in terms of debt, inventory, etc. as compared to the small scale firms.

(v) Seasonal factor: Higher amount of working capital is required by the organisation during its peak season as the level of activities is higher as compared to the lean season.

(vi) Business cycle: During boom period, when sales are high, higher amount of working capital is required as compared to the depression period.

(vii) Credit availed: If it is difficult to avail credit by the firm (on its purchases) from suppliers, then higher amount of working capital is required.

(viii) Availability of raw material: Higher lead time (i.e. time lag between the placement of order and actual receipt of the materials) and interrupted availability of raw materials will raise the requirement of working capital.

(ix) Operating efficiency: Less requirement of working capital will be there in a firm in the presence of best sales effort, ideal debtors turnover ratio and higher inventory turnover ratio.

(x) Level of competition: Working capital requirements will be more if level of competition is high.

(xi) Inflation: At a higher late of inflation, working capital requirement will also be higher

(xii) Growth prospects: If an organisation has planned for higher growth prospects then its requirement for working capital will be higher.

With inflation, the working capital requirements become higher as larger amount of money is required to maintain a constant volume of production and sales.