Question

Explain the importance of adequate working capital for business.

Enumerate two factors which bring out the importance of working capital to a business.

Answer 1

1. Timely Payment of Dues: A business with adequate working capital can pay its creditors on time. Timely settlement of liabilities ensures the short-term solvency of the business.
2. Smooth Working: Having sufficient working capital allows a business to buy raw materials, pay wages and salaries, and cover its expenses. This ensures a smooth flow of production and distribution. Without enough working capital, the business may become stagnant.
3. High Credit Worthiness: A business with a healthy working capital position earns a strong reputation for creditworthiness. As a result, it can easily obtain loans from banks and financial institutions, often on more favourable terms.
4. Cash Discount: A business with enough liquid funds can benefit from cash discounts offered by suppliers in exchange for early or prompt payments.
5. Availing Business Opportunities: A business with adequate working capital can quickly execute special orders when they arise. It can also purchase raw materials in bulk during the season and hold stocks to sell at higher prices. Such a business has stronger bargaining power and greater competitiveness in the market.
6. Good Relations with Employees: A business with sufficient working capital can pay wages and salaries to its employees promptly. This boosts the employees’ sense of security and confidence in the company.
7. Timely Payment of Dividends: Cash is needed to pay dividends to shareholders. If a company delays or fails to pay dividends on time due to a lack of cash, it may damage its reputation.