Business Studies – 5.1.2 The main sources of finance | e-Consult
5.1.2 The main sources of finance (1 questions)
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Working capital is the difference between a company's current assets and its current liabilities. It represents the funds available for day-to-day operations. A company can use working capital as a source of finance by effectively managing its current assets and liabilities. This involves optimizing the levels of inventory, receivables (money owed to the company), and payables (money the company owes to others).
Components of Working Capital:
| Component | Description |
| Inventory | Goods held for sale. |
| Receivables | Money owed to the company by customers. |
| Payables | Money owed by the company to suppliers. |
Importance of Managing Working Capital Effectively:
- Ensures smooth operations: Sufficient working capital allows the company to meet its short-term obligations (e.g., paying suppliers, employees).
- Avoids financial difficulties: Adequate working capital reduces the risk of insolvency.
- Improves profitability: Efficient working capital management can reduce costs (e.g., storage costs for inventory) and increase sales.
- Enhances creditworthiness: A healthy working capital position makes the company more attractive to lenders.