Significance of Adequate Working Capital

14/07/2020 1 By indiafreenotes

Adequate working capital means an amount of working capital sufficient to meet day to day operation activities of the business concern under normal situations. No business can run successfully without an adequate amount of working capital. If an enterprise has an adequate working capital, it is able to carry on its affairs without any financial stringency and economically. It will also be ready to face losses and unforeseen emergencies without inviting any disaster.

Importance or Advantages of Adequate or Optimum Working Capital

Ability to Face Crisis: Adequate working capital enables a business concern to face the crisis during emergency period such as depression. Most of the business concern have no adequate working capital during depression period. If one business concern has adequate working capital, the specified business concern can reap more benefits.

Cash Discount: If proper cash balance is maintained, the business can avail of the cash discount facilities offered to it by the suppliers.

Solvency of the Business: Adequate working capital ensures uninterrupted flow of production. The finished goods can be sold thereby increase in sales turnover and results in the sufficient cash in hand. In this way, solvency of the business is maintained.

Liquidity: An able businessman can determine the extent of working capital requirements i.e. adequate working capital. In this context, the liquidity of the business concern is maintained with the help of adequate working capital.

Easy Loan: If a business concern maintains high solvency of business and goodwill banks and financial institutions are ready to extent credit facility i.e. loan on favorable terms. In this way, the business concern gets the loan very easily.

Goodwill: Whenever the solvency of the business is maintained, the business concern can make the. Payments within the stipulated time very easily. If so, the good will of the business concern is created and maintained in the days to come.

Regular Supply of Raw Materials: Adequate working capital ensures regular supply of raw material for continuous flow of production.

High Morale: The executives cannot use the available funds according to their wishes. If so, misuse of funds is highlighted through the business operation. The uses of funds increase efficiency of employees and results in the higher income. In this way, high morale is maintained among the employees.

Regular Payment of Commitments: The wages and salaries and other day to day operating expenses should be paid within the stipulated time. It is possible only because of maintaining adequate working capital. The regular payment of commitments increase the efficiency of employees and reduces wastage, costs and enhances production and profits.

Meeting unseen Contingencies: It provides funds for unseen emergencies so that a business can successfully meet the contingencies. The impact of contingencies on the business operation can be reduced at the maximum.

Good Relations with Banks and Financial Institutions: A business concern can repay its loan with interest within the due date by having adequate working capital. This type of practice ensures good relations with banks and financial institutions.

Increased Fixed Assets Productivity: Generally, fixed assets are acquired for increasing earning capacity of the business concern. Therefore, the fixed assets should be used properly. The fixed assets can be used properly for increasing productivity with the help of adequate working capital.

Exploitation of favorable Market Conditions: Market condition is in such a way that trade discount and low price are available for bulk purchase. These type of favorable market conditions can be availed only if adequate working capital is maintained.

Research and Innovation Programme: No research programme, innovation and technical developments are possible to be undertaken without sufficient amount of working capital.

Quick and Regular Return on Investments: Investor would always look for a way to earn quick bucks. They also expect a regular returns on their investments. A company can pay the dividends to its shareholders i.e. investors very quickly and regularly by maintaining sufficient amount of working capital. This type of practice helps in obtaining confidence among the shareholders.

Expansion Facilitated: The expansion of any type of business programme requires additional funds. Adequate working capital facilitates the business concern for the successful implementation of the expansion programme.

Increased Profitability: There should be a right proportion of fixed assets and current assets. The maintenance of adequate working capital ensures the right proportion of fixed assets and current assets. If so, there is a chance of being increased profitability of the business concern.