Importance or advantages of adequate working capital

Advantages of working capital

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 adequate 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 payment and hence help in creating and maintaining Goodwill.

3. Easy loans : A concerns having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favorable terms.

4. Cash discount : Adequate working capital also enable a concern to avail cash discounts on the purchase and hence it reduces costs.

5. Regular supply of raw materials : Sufficient working capital ensures regular supply of raw material and continuous production.

6. Regular payment of salaries, wages and other day to day commitments : A company which has adequate working capital can make regular payment of salaries, wages and other day to day commitments which rises the morale of it's employees, increase their efficiency, reduces wastage and costs and enhances production and profits.

7. Exploitation of favorable Market condition : Only concerns with adequate working capital can exploit favorable Market conditions such as purchasing it's requirements in bulk when the prices are lower and by holding it's inventories for higher prices.

8. Ability to face Cruces : Adequate working capital enables a concerns 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 investment : Every investor want a quick and regular return on investments. Sufficiency of working capital enables a concern to pay quick and regular dividends to it's investors as there may not be much pressure to plough back profits. This gains the confidence of it's investors and creates a favourable market to raise additional funds in the future.

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