Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential, in the human body for maintaining life, working capital is necessary for a business to flourish. The main advantages of maintaining adequate working capital are adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production. Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill.
A concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favourable terms. Adequate working capital also enables a concern to avail cash discounts on the purchase and hence it reduce cost. Sufficient working capital ensures regular supply of raw material and continuous production.
Adequate working capital can exploit favourable market conditions such as purchasing its requirements in bulk when the prices are lower and by holding its inventories for higher prices. It helps a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital.
Every investor wants a quick and regular return on his investments. Sufficiency of working capital enables a concern to pay quick and regular dividends to its investors as there may not be much pressure to plough profits. This gains the confidence of its investors and created a favourable market to raise additional funds in the future.
Adequacy of working capital creates an environment of security, confidence, high morale and creates overall efficiency in a business. A company which has ample working capital can make regular payment of salaries, wages and other day to day commitments which raises the morale of its employees, increases their efficiency, reduces wastages and costs and enhances production and profits. Working capital is the powerful tool for every organisation.