Question

How does working capital affect both the liquidity as well as the profitability of a business?

Answer 1

Working capital refers to the portion of capital which is invested in current assets. It should neither be less or more than what is required. If it is more than the required amount, it will increase the liquidity but decrease profitability. On the other hand, if the working capital is less, then there would be difficulties in meeting the current liabilities. Thus, the amount of working capital should be optimum, so that neither profitability nor liquidity is affected.