Discussion

FIN 534

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 The efficient running of any enterprise requires effective working capital management.

Working capital can be defined as the difference between current assets and short-term liabilities

(1). Current assets are the resources that the business owns that are expected to be consumed

within a year, such as inventory, cash, and accounts receivable. On the other hand, short-term

liabilities are the items that a business should pay within a year, such as accrued salaries and bills

payable. Working capital can be negative or positive depending on whether the current assets are

more than the short-term liabilities. The optimal working capital is determined by the current and

the quick asset ratio.

Holding too much working capital could be disadvantageous in multiple ways. For

instance, the organization may have more stock than it needs, which increases inventory costs

and the risk of the stock becoming obsolete (1). Moreover, it diminishes the amount of money

that may be invested in long-term projects to ensure the long-term success of a business.

On the other hand, having low working capital could adversely affect the business in two

primary ways. First, it may diminish the ability of the business to take advantage of profitable

short-term investments that could have high returns due to low liquidity. Additionally, it could

ruin the relationship between the business and suppliers because it may lack the necessary cash

to pay suppliers and employees on time (1). Finally, the operating cost of the company may

increase as it may be compelled to borrow short-term loans that it should repay with interest

frequently.
 Sources

1. Russell Boisjoly, 2020, Working capital management: Financial and valuation

impacts. Journal of Business Research, 108, 1-8.