A short overview of working capital 2

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Importance of  adequate working capital :
A business firm must preserve an adequate level of working capital in order to run its business smoothly.It is worthy to note that both excessive and inadequate working capital positions are harmful.However,out of two,inadequacy of working capital is more dangerous for a firm.No business can run successfully without an adequate amount of working capital in the business.The following are a few advantages of working capital in the business.
1.Cash discount : Adequate working capital enables a firm to utilize cash discount facilities offered to it by the facilities.The amount of cash discount reduces the cost of purchases.
2.Goodwill : Adequate working capital enables a firm to make instant payment.Making prompt payment is a base to create and maintain goodwill.
3.Ability to face crisis : The provision of adequate working capital facilitates to meet situations of crisis and emergencies.
4.Credit-worthiness : It enables a firm to operate its business more efficiently because there is no delay in getting loans from banks and others on easy and favorable terms.
5.Regular supply of raw materials : It ensures regular supply of materials and continues production.
6.Expansion of markets : A firm,which has adequate working capital,can create favorable market condition.That is so because purchasing its requirements in bulk when prices are lower and holding its inventories for higher.Thus profits are increased.
7.High moral : Adequate of working capital creates an environment of security,confidence,high moral etc. and creates overall efficiency in business.

 Danger of excessive working capital :

When there is too much working capital,it is also dangerous .Excessive working capital raises the following problems:
1.A firm may be tempted to over trade and lose heavily.
2.The situation may lead to unnecessary purchases and accumulation of inventories.This cause more chance of theft,waste,losses.
3.There arises an imbalance between liquidity and profitability.
4.Excessive working capital means funds are idle.When funds are idle,no profit is earned.When it is so,the rate of return on its investment goes down.
5.The situation leads to greater production which may not have matching demand.
6.The excess of working capital may lead to carelessness about cost of production.

So maintaining an adequate working capital is a leading part of a firm.

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