(b) Determining the amount to be invested in current assets as working capital is a crucial policy decision for any entity. What FACTORS should a…

(b) Level of investment depends on the various factors listed below: (a) Nature of Industry: Construction companies, breweries etc. requires large investment in working capital due long gestation period. (b) Types of products: Consumer durable has large inventory as compared to perishable products. (c) Manufacturing Vs Trading Vs Service: A manufacturing entity has to maintain three levels of inventory i.e. raw material, work-in-process and finished goods whereas a trading and a service entity has to maintain inventory only in the form of trading stock and consumables respectively. (d) Volume of sales: Where the sales are high, there is a possibility of high receivables as well. (e) Credit policy: An entity whose credit policy is liberal has not only high level of receivables but may require more capital to fund raw material purchases as that will depend on credit period allowed by suppliers.