Discuss the need and importance of working capital.
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Why is an adequate amount of working capital required in an enterprise?
Adequate working capital is essential for smooth and efficient working of every business enterprise. Adequate working capital provides the following advantages to a business enterprise:
(i) A firm with adequate working capital can meet its liabilities promptly. Prompt payment helps to raise the credit-standing or reputation of the enterprise.
(ii) Adequacy of working capital enables the firm to take advantage of any favourable business opportunity, eg. to purchase raw materials at a discount or to execute a special order.
(iii) Financial soundness of business boosts the morale of employees.
(iv) Lack of adequate working capital may result in interruptions in operations and underutilisation of plant capacity.
(v) Adequate working capital permits timely and regular payment of cash dividends. This helps to maintain cordial relations with shareholders.