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How Does Working Capital Affect Both the Liquidity as Well as Profitability of a Business? - Business Studies

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ConceptConcept of Fixed and Working Capital

Question

How does working capital affect both the liquidity as well as profitability of a business?

Solution

Working capital is the difference between current assets and current liabilities. It affects both liquidity and profitability of the business.

  • The increase in current assets increases the liquidity position of the business but affects the profitability adversely because the return on current assets is quite low.
  • Low working capital will affect the liquidity of the business which may disturb the day to day operation.

So the working capital should be maintained at such a level that a proper balance could be maintained between profitability and liquidity.

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Solution How Does Working Capital Affect Both the Liquidity as Well as Profitability of a Business? Concept: Concept of Fixed and Working Capital.
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