Question

1. Who should be consulted when setting working capital levels and for what reason? 50–80 words

2. What is the main reason for setting a correct level of working capital? 50–80 words

Answer 1

1. Working capital refers to the amount that is derived after subtracting the current liabilities from current assets. this amount is used for the day-to-day business operations of a company and hence must be at an acceptable level. Therefore a highly professional individual such as an accountant must be consulted who can use ratios related to working capital and advise the company on what a best level would be. Managers review the advise given by industry specialists and make the final decision on working capital levels.

2. the main reason for setting a correct level of working capital is that it is a reflection of the company's inventory, accounts receivable, accounts payable, cash, etc. It represents the company's ability to pay the short term debts or expenses using the working capital funds. having too much working capital is not preferred because that would show that assets are not being invested for a long term thus reducing the company's growth. a good working capital ratio would be somewhere around 2.0 which represents good short-term liquidity for the company.