30.

Neelabh is engaged in ‘Transport business’ and transports fruits and vegetables to different states. Stating the reason in support of your answer, identify the working capital requirements of Neelabh. Neelabh also wants to expand and diversify his transport business, explain any two factors that will affect his fixed capital requirements.

Neelabh is engaged in a trading business which needs a small amount of working capital compared to a manufacturing business. A manufacturing business needs to spend on raw materials, pay labour charges for manufacturing and also incur other indirect expenses. As Neelabh is engaged in transport business and transport of fruits and vegetables, he need not have to spend on manufacturing or producing goods. On the other hand, fruits and vegetables are perishable goods, so he has to take the good immediately to the sellers and thus expense on warehousing will also be nil. Thus other factors remaining the same, Neelabh requires less working capital.
If Neelabh has a plan to expand and diversify his business the following factors will affect his working capital requirements
1) Level of Competition: Higher level of competitiveness may necessitate larger stocks of goods to meet urgent orders from customers. This increases the working capital requirement.
2) Operating Efficiency: Neelabh’s need for working capital also depends on his own operational efficiency. A better debtor’s turnover ratio will enable him to reduce the amount tied up in receivables which reduces his working capital requirement. Better sales effort may reduce the average time for which inventory is held. Such efficiencies may reduce the level of finished goods and debtors resulting in lower requirement of working capital.