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Advantages or Importance of Working Capital

(i)                 Adequate working capital ensures the regular supply of raw materials and continued production.

 

(ii)               Easy to get the loan from the banks and other financial institutions on easy and convenient terms

 

(iii)             It enables the firm to avail cash discount facilities on the purchases, thus it reduces the costs.

 

(iv)             To follow as a prompt payment policy helps in establishment of goodwill.

 

(v)               It helps the organisation to meet the financial crisis during the· periods of depression or any emergencies.

 

(vi)             The expansion programme of a concern is highly successful and obtains higher profitability.

 

(vii)           It improves high morale among employees and executives in the organisation.

 

(viii)         To encourage research programme

 

(ix)             To obtain the higher level of productivity due to effective utilisation of assets

 

(x)               Enables to pay higher return to its owner. So automatically the firm possesses a financial soundness. In this way it helps to generate additional funds in future.

 

Disadvantages or Danger of Inadequate Working Capital 

 

(i)                 A concern cannot pay its short term liabilities because of inadequate working capital. This leads to borrowing funds at higher rates of interest.

 

(ii)               It may not take advantage of cash discount because the concern may find it difficult to buy its requirement in bulk quantities.

 

(iii)             Low level liquidity position of the concern may lead to winding up of the firm.

 

(iv)             Fixed assets could not be fully utilised on account of lack in sufficient working capital. So the rate of return on investment falls.

 

(v)               It is very difficult to obtain favourable market conditions and any of the profitable business opportunities.

 

(vi)             Credit worthiness and reputation of the organisation may be damaged.

 

(vii)           It leads to under-utilisation of production facilities.

 

Disadvantages of Excessive Working Capital

 

(i)                 Unnecessary purchases and accumulation of inventories lead to chances of more losses and waste.

 

(ii)               Due to huge amount of idle funds the rate of return on its investment automatically goes down.

 

(iii)             It leads to overtrade and chances of heavy losses.

 

(iv)             Difficult to maintain the cordial relationship with the bank and other financial institutions.

 

(v)               Large amount of bad debts arise.

 

(vi)             It encourages mass production which may not have matching demand.