Business Studies – 5.5.2 Liquidity | e-Consult

Working capital is the difference between a business's current assets and its current liabilities. It represents the funds available to finance day-to-day operations. It's essential for a business to maintain a sufficient level of working capital to meet its short-term obligations and ensure smooth operations.

Two methods a business can use to improve its working capital are:

• Improving Inventory Management: This involves optimizing inventory levels to reduce the amount of capital tied up in stock. Techniques include Just-in-Time (JIT) inventory systems and better demand forecasting. Drawback: JIT systems are vulnerable to supply chain disruptions and require very accurate forecasting. Stockouts can occur if demand is underestimated.
• Negotiating Extended Credit Terms with Suppliers: This allows the business to delay payments to suppliers, improving its cash flow. Drawback: Suppliers may charge higher prices for extended credit terms, reducing profit margins. It can also damage relationships with suppliers if not managed carefully.