Advantages of Working Capital
Positive working capital indicates that a company can fund its current operations and invest in future activities and growth, and it also shows the company’s operational efficiency and short-term financial health. The major advantages of working capital are as follows:
- Solvency: Adequate working capital helps in maintaining the solvency of the business by providing an uninterrupted flow of production.
- Goodwill: Sufficient working capital enables a business concerned to make prompt payments and hence helps in creating and maintaining goodwill, as maintaining adequate working capital gives stakeholders confidence in the company.
- Easy Loans: A concern having adequate working capital, high solvency, and good credit standing can arrange loans from banks and other sources on easy terms, as healthy working capital suggests a better financial position.
- Regular Supply of Raw Materials: Sufficient working capital ensures a regular supply of raw materials and continuous production.
- Regular payment of wages: Adequate working capital ensures that workers get regular payments, which helps them boost their morale and ensure uninterrupted production.
- Ability to Face Uncertainty: It enables a concern to face business crises in emergencies such as volatile markets, uncertain market forces, etc. because during such periods, generally, there is much pressure on working capital.
What is Working Capital? – Formula, Components, Limitations
Working Capital represents the firm’s holdings of assets like cash, marketable securities, receivables, etc. Funds, being the backbone of any efficient business, are the most important aspect to be managed. Careful maintenance of the working capital and fund mix to acquire are key areas of decision-making and are important as they help to meet any business contingencies.
From an accounting perspective working capital is the difference between the short-term sources of funds, i.e., the current assets, and the short-term financial obligations, i.e., the current liabilities. In this article, we are providing you with all the information regarding working capital and its formula, components, and limitations.
What is Working Capital?
Table of Content
- Working Capital
- Components of Working Capital
- Formula for Working Capital
- Significance of Working Capital
- Advantages of Working Capital
- Limitations of Working Capital
- FAQs on Working Capital