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7. (a) Explain the term working capital - Leaving Cert Business - Question 7 - 2018
Question 7
7. (a) Explain the term working capital. (b) Outline two problems caused by insufficient working capital for a start-up business. (i) (ii)
Worked Solution & Example Answer:7. (a) Explain the term working capital - Leaving Cert Business - Question 7 - 2018
Step 1
Explain the term working capital.
Answer
Working capital refers to the cash available for daily operations in a business. It represents the difference between current assets and current liabilities. Essentially, it consists of the funds used to cover short-term operational expenses such as paying suppliers and employees. A healthy level of working capital is crucial for maintaining the liquidity of a business, ensuring that it can meet its short-term obligations efficiently.
Step 2
Outline two problems caused by insufficient working capital for a start-up business.
Answer
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Cash Flow Issues: Insufficient working capital can lead to cash flow problems, making it challenging for the business to meet its day-to-day expenses. This could result in missed opportunities to invest in necessary resources or hire essential personnel, ultimately hindering business growth.
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Inability to Meet Liabilities: A lack of working capital may prevent a business from paying its short-term liabilities on time. This can damage its relationships with suppliers and creditors, leading to challenges in accessing credit or obtaining essential goods and services.