The main advantages or importance of working capital are
- Strengthen The Solvency: Working capital helps to operate the business smoothly without any financial problem for making the payment of short-term liabilities. Purchase of raw materials and payment of salary, wages and overhead can be made without any delay. Adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production.
- Enhance Goodwill: Sufficient working capital enables a business concern to make prompt payments and hence helps in creating and maintaining goodwill. Goodwill is enhanced because all current liabilities and operating expenses are paid on time.
- Easy Obtaining Loan: A firm having adequate working capital, high solvency and good credit rating can arrange loans from banks and financial institutions in easy and favourable terms.
- Regular Supply of Raw Material: Quick payment of credit purchase of raw materials ensures the regular supply of raw materials from suppliers. Suppliers are satisfied by the payment on time. It ensures regular supply of raw materials and continuous production.
- Smooth Business Operation: Working capital is really a life blood of any business organization which maintains the firm in well condition. Any day to day financial requirement can be met without any shortage of fund. All expenses and current liabilities are paid on time.
- Ability to Face Crisis: Adequate working capital enables a firm to face business crisis in emergencies such as depression.