Only for Dr. Keloki

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Date: 30/12/2013

Working capital is regarded as quantum of measuring how efficiently and efficiently a company is working and also measures the quantum of its finances in the short term.  Working capital, in is simply measured by taking or rather considering the current assets of the firm and subtracting it from the current liabilities.  This measure helps a firm to see how well it would be for example, how effective is the firm in repaying its creditors in the short term period. Working capital is required for meeting out day to day expenses and operations at business. Thus it helps the firm to carry out its operations in an effective manner.

Short term financing would ensure to maintain liquidity for the business. Small enterprises like Genesis and prone to short term finance shocks due to working environment because of large debtor declaring bankrupt and so short term financing help to meet the operational need and mechanism. The mechanism of short term financing is relatively easy to negotiate. Moreover, short term financing requires less collaterals and pledges and it has relatively low cost of servicing that is beneficial for the business enterprises or the companies.

Working capital is required for the business. The current assets are required for short term purpose such as purchase of inventory, raw materials, payment made as wedges to the worker and other miscellaneous day to day expenses are maintained by working capital. It helps in maintain the flow of marketable securities, cash, debtors and investors and hence the fund in the business keeps revolving and constantly converted into cash. Working capital helps in keeping the flow of operation revolving for the business. Thus it acts as a source of financing and maintains the liquidity of the business by protecting it from the short term finance shock due to working environment.

References:

Rehn Erik (2012), “Effects of Working Capital Management on Company Profitability”.

Gish Will, “The Importance of Working Capital Management in Avoiding Bankruptcy”.