ADEQUACY OR INADEQUACY OF WORKING CAPITAL: ITS IMPORTANCE AND IMPLICATION. (#3339)

INTRODUCTION The primary aim of establishing or going into business is to optimize profit and as well as to ensure continuity of that business concern. When one person (sole trader ) of group of person (partnership of companies limited by shares or guarantee) intends forming a business entity he will need both fixed and current assets to facilitate a smooth take off, these fixed and current assets will by funded from both long term liabilities and current liabilities (or capital) as the case may be.    On formation, the business as an entity will be provided with fixed assets, such as building and premises, plant and machinery. Equipments, motor van etc. But form all indication we know and we see that these fixed assets itemized above cannot achieve the aforesaid aims of establishing the business. This is so because the fixed assets where not bought for the purpose of resale as a result any project cannot be directly accruable from its continuous stay. From the foregoing, it is easily deduceable from it that the business as a going concern need some indispensable items or factors that will determine its profitability and its ability to withstand the test of time in a prevalent competitive environment These indispensable items are operational and resolving in contrast with fixed capital and this is what we termed as the “”working capital”.
ADEQUANCY OF WORKING CAPITALIn our previous chapter, we were made to understand that excess of current asset over current liabilities, and that the working capital is an indispensable factor that will keep an organisation in operation. Since the working capital is the life – block of any business (ie it can determine the business profit ability, continuity, competitiveness etc.) it is imperative to have sufficient amount of it (working capital ) in any organisation that aspire to meet its primary aim of establishmentArrangement of funds for financing working capital requirements should be made by the manager. Whenever there is a need for working capital, arrangement should be made quickly for it. Similarly, if surplus funds arise, they should not be allowed to remain idle, but should be invested in short term maturing securities. The financial manager should have knowledge of the sources of working capital funds as well as temporarily invested.