I am looking for a business loan. But, how do I gauge my working capital requirements? What are the factors that affect it?
One is the length of the operating cycle - the number of days taken, right from procuring material to making collections against sales from customers.
Next is, how you manage your inventory/stock. A just-in-time or JIT policy where the material is sourced only just before the need arises will require a lower level of working capital compared to a firm that tends to stock up well in advance. A JIT policy is also beneficial for those businesses which handle perishable products.
Also, the more bargaining power that you have over your suppliers, the better your prospects are for lowering the cost or for extending the credit period. This, in turn, will positively benefit the working capital situation of your business since it now has lesser outflows (thereby increasing the Net Working Capital) and an increase in the time that you have to repay your suppliers (leading to a smaller and faster operating cycle).
Then, the size of the firm. A company operating on a large scale means that it has more funds into the business by way of a higher asset base or installed capacity than a company which is small scale. A larger firm would definitely require a higher amount of working capital compared to a smaller one.
The credit policy dictates the duration allowed to clients for paying back their dues to your business.
A higher period will attract the need for a higher working capital.
The size of sales is one of the important factors in determining the amount of working capital. Also, the seasonality of business, which means that the sales and operational activities are not spread out evenly throughout the financial year.