Question

Step 1

Post your response.

Post an example of a particular situation where net working capital needs will increase and explain why net working capital should typically be increased for a new project.

Answer 1

A typical example where net working capital needs are increased is when we increase our operation. Net working capital is used for the day to day expense of running the operation for a business. This is the cash that is required on a daily basis by the business to run their operation. Thus whenever the operation increases its size or frequency, the working capital requirement increases.

For example, let’s say a business begins their operation in another city. In addition to the fixed capital requirement, the working capital requirement will increase as well. This is because they will need more money to operate in more places than one.

Whenever a new project is undertaken, it requires additional effort in terms of equipment, logistics, and operational overheads that are required on a regular basis. Thus, the overall working capital requirement increases whenever a new project is undertaken.