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State the working capital ratio - HSC - SSCE Business Studies - Question 23 - 2007 - Paper 1
Question 23
State the working capital ratio. ................................................................................ Explain why working capital is important to busine... show full transcript
Worked Solution & Example Answer:State the working capital ratio - HSC - SSCE Business Studies - Question 23 - 2007 - Paper 1
Step 1
Step 2
Explain why working capital is important to business.
Answer
Working capital is crucial for several reasons:
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Liquidity Management: It ensures that a business has enough liquidity to meet its short-term obligations, such as paying suppliers and employees on time.
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Operational Efficiency: Adequate working capital allows businesses to maintain operations without interruptions, ensuring that they can purchase inventory and manage day-to-day expenses efficiently.
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Business Growth: Sufficient working capital supports growth opportunities as it allows a business to invest in new projects or expand operations without the risk of cash flow shortages.
Step 3
Recommend TWO strategies to manage working capital.
Answer
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Leasing and Sale-Leaseback: Businesses can manage working capital by utilizing leasing options for equipment which allows them to preserve cash flow. Additionally, they can use sale-leaseback agreements, freeing up capital that can be reinvested.
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Factoring Accounts Receivable: By selling their accounts receivable to a factoring company, businesses can obtain immediate cash, helping to enhance liquidity and manage working capital more effectively.