# Factors to Consider While Planning Working Capital Requirements
A finance manager must examine multiple internal and external factors before estimating working capital needs.
## 1. Need for Cash
Identify the cash balance that meets day-to-day expenses while reducing cash-holding costs.
## 2. Desired Level of Inventory
Identify a level that allows uninterrupted production but minimises raw material investment. Techniques used:
- Just-in-Time (JIT)
- Economic Order Quantity (EOQ)
## 3. Receivables Policy
Design credit terms that attract customers while ensuring the cash conversion cycle impact is offset by increased revenue.
Tools: Discounts and allowances.
## 4. Short-term Financing Options
Inventory is ideally financed by supplier credit. If the cash conversion cycle is long, firms may use:
- Bank loan / overdraft
- Factoring (converting debtors into cash)
## 5. Nature of Business
- Restaurant → mostly cash sales → low WC needs.
- Manufacturer with long credit terms → high WC needs.
## 6. Market and Demand Conditions
If demand far exceeds production, finished goods inventory is low, so WC requirement is less.
## 7. Technology and Manufacturing Policies
For seasonal goods, firms may choose:
- Steady production all year (high WC during off-season)
- Production only during demand season (less inventory)
## 8. Operating Efficiency
Reducing waste and improving coordination lowers the WC requirement.
## 9. Price Level Changes
Rising prices ⇒ higher cash outlays for the same level of activity ⇒ higher WC needed.
## Summary Mnemonic — 'C-I-R-S-N-M-T-O-P'
Cash, Inventory, Receivables, Short-term financing, Nature, Market, Technology, Operating efficiency, Price levels.