Based on IGNOU Assignment Solution and others
Answer:
„Working Capital‟ discussed in the earlier paragraphs mean excess of current assets over current liabilities. Such Working Capital is required to smooth conduct of business activities. It is as important as blood to body. An organization‟s profitability depends on the quantum of Working Capital available to it. Adequate Working Capital is a source of energy to any business organisation. It is the life blood of an organisation.
The following points will highlight the need of Working Capital.
Adequate Working Capital :
- Enables a company to meet its obligations.
- Ensures the credit standing of a company.
- Facilitates obtaining Credit from banks without any difficulty.
- Ensures solvency of a company.
- Enables a company to make prompt payments to its creditors and thereby take advantage of cash and quantity discounts offered by them.
- Enhances the goodwill of a company as it can meet its operational expenses and maturing liabilities in time.
- Improves the prospects of prosperity and progress of a company.
- Enables an organisation to tide over difficult periods successfully.
Thus, adequate Working Capital is an important factor for prosperity and smooth running of a business organisation. It is rightly called as the “backbone” of the financial structure of a business organisation.
