Question

How does working capital affect the liquidity of a company?

Answer 1

Working capital by its definition means the capital employed in day-to-day operation/running of business. To run the business you need capital and if the cycle of the working capital is too long you might face problems in paying your current liabilities which is nothing but liquidity crunch. So if you have a liquidity crunch you go to a lender/bank but they charge interest and this interest would eat up a portion of your profit and hence your overall profitability will get affected.