Comment on the following: Movements of the business cycle influence working capital changes at significant level.

The recurring movements of the business cycle influence working capital changes. As business recedes, companies tend to defer capital replacement programmes and deflect depreciations to liquid balances rather than fixed assets. Similarly, curtailed sales reduce amounts receivable and modify inventory purchases, thereby contributing further to the accumulation of cash balances. Conversely, the sales, capital, and inventory expansions that accompany a boom produce a greater concentration of credit items in the balance sheet. The pressure on company finances during boom years is reflected in the business drive for loans and the high interest rate of these years as compared with a reversal of such conditions during the periods of economic decline.