The Importance Of Working Capital For A Business

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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 a, working capital which also covers overhead costs. Companies aspire to maintain their cash at a desirable level in order to offset liabilities on maturity and the availability of production materials require by the business to provide customers’ needs indicates the importance of working capital. Working capital can be sub-divided into two areas, that is, regular working capital – it provides a steady base for overall business objectives; and short-term working capital that is used to facilitate the day-to-day business operations. There are various sources of finance for working capital which include retained earnings, credit from suppliers, and long-term loans from financial institutions or proceeds from sale of assets. Generally, investment in working capital could be grouped into permanent and variable. Permanent investment in working is the portion of working capital kept to sustain the level of sales which is not affected by seasonality while variable working capital is the additional working capital required during periods of fluctuations in sales. It is expected the permanent working capital would be financed by long term capital while variable working capital is financed by short term capital. According to (Merchant), a
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