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Question
How does working capital affect both the liquidity as well as profitability of a business?
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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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Group A |
Group B |
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a. Fixed Capital |
1. Owned Capital |
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b, Overdraft facility |
2. Bearer document |
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c. Share certificate |
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d. Debentures |
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6. Dividend |
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9. Savings Account |
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10. Registered Document |
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Explain the following as factor affecting the requirements of fixed capital:
Scale of operations
Answer the question.
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Net working capital may be defined as the:
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Reason (R): Commercial bill is a short-term, negotiable, self-liquidating instrument which is used to finance the credit sales of firms.
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