es are generated through short term financing (Brealey, & Myers,1988).
The amount of working capital required tends to vary according to the type of industry, and the commercial charac teristics of the industry. Thus, a manufacturer of commercial jet airframes, such as the Boeing Company, must be able to support a very long work in progress time up to twenty four months for some models, in comparison to a manufacturer of seats for use in commercial airliners, with a work in progress time of no more than one week. In this example, for this rea son alone, the airframe manufacturer would require far more working capital than would the seat manufacturer (there are, of
course, several other critical factors involved in working cap ital requirment determinations, such as average cost per unit, average order size, and so forth).
When the commercial characteristics of an industry are considered, different factors influence the level of required working capital. Of critical significance in this context are (1) the relationship between the amount of output sold for cash, and that sold on credit (particularly relevant in the case of automobile retailers), and (2) the terms of credit extended (also a critical factor for automobile dealers). Thus, the amount of working capital required for a McDonald's Restaurant (where all sales are for cash) will be proportion ately far less than that required for the typical fine jewelry store (where significant proportions of most sales may be charged to customers' store accounts).
In the context of the terms of credit, a department store which permits its credit customers to pay only ten percent per month on outstanding balances requires proportionately far more working capital than does the materials wholesaler which expects accounts to be paid in full within thirty days of a sale.
The preceding discussions illustrate the significance of industry characteristics, and of commercial pra...