Working capital is likely grow to cover

The working capital requirements are also determined by the nature of the business cycle. Business fluctuation leads to cyclical and seasonal changes which, in turn, cause a shift in the working capital position, particularly for temporary working capital requirements. The variations in business conditions may be in two directions:

Upward phase when boom conditions may be in two directions Downswing phase when economic activity is marked by a decline.

During the upswing of business activity the need for working capital is likely grow to cover the lag between increased sales and receipt of cash as well as to finance purchases of additional material to cater to the expansion of the level of activity. Additional funds may be required to invest in plant and machinery to meet the increased demand. The downswing phase of the business cycle will have exactly an opposite effect on the level of working capital requirement. The decline in the economy is associated with a fall in the volume of sales which, in turn, will lead to a fall in the level of inventories and book debts. The need for working capital in recessionary conditions is bound to decline. In brief, business fluctuations influence the size of working capital mainly through the effect on inventories. The response of inventory to business cycles is mild or violent according to the mild or violent nature of the business cycle.