You are here: Home / Management Accounting / Importance or Advantages of Adequate Working Capital

Importance or Advantages of Adequate Working Capital

Posted by Ripon Abu Hasnat on Wednesday, May 27, 2015 | 0 comments

Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can run successfully without an adequate amount of working capital. The main advantages of maintaining adequate amount of working capital are as follows:

1. Solvency of the business:

Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.

2. Goodwill:

Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill.

3. Easy loans:

A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and other on easy and favorable terms.

4. Cash Discounts:

Adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs.

5. Regular supply of raw materials:

Sufficient working capital ensures regular supply of raw materials and continuous production.

6. Regular payment of salaries, wages and other day-to-day commitments:

A company which has ample working capital can make regular payment of salaries, wages and other day-to-day commitments which raises the morale of its employees, increases their efficiency, reduces wastages and costs and enhances production and profits.

7. Exploitation of favorable market conditions:

Only concerns with adequate working capital can exploit favorable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices.

8. Ability to face Crisis:

Adequate working capital enables a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital.

9. Quick and Regular return on Investments:

Every Investor wants a quick and regular return on his investments. Sufficiency of working capital enables a concern to pay quick and regular dividends to its investors as there may not be much pressure to plough back profits. This gains the confidence of its investors and creates a favorable market to raise additional funds i.e., the future.

10. High morale:

Adequacy of working capital creates an environment of security, confidence, high morale and creates overall efficiency in a business.