Question

Question 4:

What are some economic factors that affect the capital requirements? Explain

Answer 1

The some economic factors that affect the capital requirements are as follows :

1.) Demand and Supply- The two most common factor that affects the capital requirements is the "Demand and supply", Demand represent the consumers willingness and ability to pay for the product or services which business offers and the supply is to fulfilling the needs of the customers as per their demands and the demand and supply factor affects the working capital requirements of the business firm, which includes cash and inventory and liabilities, with the increase or decrease in demand and supply, the inventory and cash also get impacted.

2.) Money and Banking - Banking assists the financial policies that impact business capital requirements and also to the customers of the business and money which is circulated in the market indicates the demands of the consumers on the other hand banking assists regarding the borrowing ability of the business as well as the consumers and the policies which bank formed play vital role in impacting the prices of the products and also the interest rates.

3.) Income and Employment : The employment is the important aspect of the economy and the rate of employment also helps in knowing the demand percentage in the company and when the gross domestic product (G.D.P) of the economy is higher then there are more jobs available in the market and that creates more income which leads to the rise in the demand and business is directly linked with the impact of the decrease or increase in demand affects the working capital requirements of the business firm like cash, inventory/stock, etc.

4.) Inflation - Inflation comes when there are more supply of the money in the market and on the other hand there are insufficient supply of the goods or products in the market. The business needs to increase the price to retain themselves in the market and with the rise of the prices the cost of raw material also rises which is required for the production process. which will impact the current ratio of the business or working capital ratio of the company and now business needs to maintain more cash in hand and stock or inventory for the sale purpose.