The liquid Capital needs of a firm are influenced by numerous factors. The important principles of liquid capital are as under: -
(1) Nature of Business
The amount of liquidity required by a firm depends largely on the nature of business. In rail components, Transports Company, electronic company and many other welfare institutions of very less amount of liquidity are required because the amount of liquidity depend on cash receipt and sales of service in cash. Contrary to this business firm organized in the productive of luxury items need a large amount of liquid capital, because due to fluctuation in demand, they need a higher quantity of stock.
(2) Seasonality of Business
Due to seasonal business fluctuations, the demand for these products may. They have product in particular seasons. The amount of liquidity had also fluctuated according to the seasonal requirements. Some industries are such in which the demand for these product remains in the whole year but the production will be done in a particular season as sugar industry, woolen industry and cola industries in Nepal. In those types of industries, a large amount of liquidity is required in the productive season.
(3) Production Polices
No business concern can fully on cash sales. It has to sales on credit, If the credit period is less and collection department inefficient than more liquid resources is required. If the collection period is long than a high amount of liquid capital is required. Thus, the ordering policy of a concern dictated the amount of liquid capital.
(4) Size of Business
The size of a business is an important factor in a determination of liquid capital. A large scaled production industry needs a large amount of liquid capital in comparison to a productive institute of small size.
(5) Period of Operating Cycle
The business concern having large gestation proportion period needs of a large amount of liquid capital, because their periodical operating cycle is of a greater period. While industry having an operating cycle of a very short period need a lesser amount of liquidity. In the first case, the concern has to keep a larger amount of capital in liquid form to pay current liabilities. Thus, the amounts of liquidity depend on upon the period of operating cycle.
(6) Proportion of Raw Material in Cost
The concern having a large proportion of raw materials in its production need higher liquidity, because, the concerns have to pay a higher amount of purchases of raw materials in a seasonal business. The concern needs the higher stock of raw materials and in that case, they need higher amount of liquidity.
(7) Credit Availability and Purchasing Time
The condition relating to credit decided by the creditors affects the amount of working capital. The business concern in which easy credit is available, the lesser amount of working capital is required. Similarly, if we have liberal credit facilities from the bank, we may run business with a small working capital.
Secondly, the time of purchasing also decides the amount of working capital. If the total raw materials are purchased at the beginning that is the time of new crops coming in the market. We require a higher amount of liquid capital in that month in the next month that is maximum amount of liquid capital requirements
(8) Fluctuation of Business Activities
If the business activity fluctuates, a higher amount of liquid capital is required. In the boom period, the demand condition increases together with the increase in prices. In this situation, the business concern requires sufficient inventory of raw materials. Contrary to this during the depuration business activities become sluggish and a lesser amount of liquid capital to be sufficient.
(9) Growth Rate of Business
The growth in existing business and the tendency of expansion directly affected the amount of liquid capital. If the growth rate and expansion are low, the lower amount of working capital may be sufficient but if the expansion is done at a higher rate than a larger amount of fund is needed for fixed assets as well as for current assets.
(10) Amount of Profit and Dividend Policy
Ploughed back of profit is an important source of working capital provided that profit is earned in cash. Therefore, in the concerns in which profit-earning capacity is due to good production and marketable securities management and monopoly, they need a lesser amount of liquid capital. On the other hands, if the profit earning capacity is low, a higher amount of working capital is required.
(11) Other Resources
Beside the above factor various other points are responsible for the amount of liquid capital: -
(a) Role of industrial development;
(b) Means of transport and communication;
(c) Political stability;
(d) Market condition; and,
(e) Condition of supplies etc.
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