The Importance Of Working Capital For A Business

1505 WordsApr 3, 20157 Pages
Companies aspire to maintain their cash at a desirable level in order to offset liabilities on maturity and the availability of production materials required by the business to provide customers’ needs, indicates the importance of working capital. This paper seeks to examine the importance of working capital to a business. By definition, in order for a business to conduct its daily operations, such as payment of wages, the purchase of raw materials, it requires funds which are referred to as working capital which also covers overhead costs. In simple terms, working capital is money available to a business for its day-to-day operations. Working capital can be sub-divided into two areas, that is, regular working capital and short-term working capital. For overall business objectives, regular working capital provides a steady base while with respect to the day-to-day operations short-term working capital is used. There are various sources of finance for working capital which include but are not limited to retained earnings, credit from the business’ suppliers, as well as long-term loans from financial institutions or proceeds from sale of the business’ assets. We can also look at the investment in working capital which could be grouped into permanent and variable components. The part of working capital which sustains the level of sales not affected by “seasonality” is referred to as permanent investment financed by long term capital while variable working capital, financed
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