Title: Advantages of Maintaining Low Working Capital
Headings: Advantages of Maintaining Low Working Capital
Advantages of Maintaining Low Working Capital
Increasing Investment Effectiveness
Improving Operating Efficiency
Shortening the Cash Conversion Cycle
On-Demand or Just-In-Time Operations

Content: Advantages of Maintaining Low Working Capital
Corporate Finance & Accounting Corporate Finance
Advantages of Maintaining Low Working Capital
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Jay Wei has 20+ years of experience as an investment and financial writer. He currently works with JW Investments as a principal. Learn about our editorial policies
Jay Wei
Updated Jun 25, 2019
Working capital, or total current assets minus total current liabilities, refers to the additional current assets that a company holds on its balance sheet as a liquidity cushion. Most current assets are funded by current liabilities and are expected to be converted back to cash within 12 months for payments on current liabilities due in the same cycle. Certain current assets may become illiquid at the time when cash is needed to meet short-term obligations, including inventory without a ready market. When avoiding liquidity issues that may hamper a company's financial strength, it is financially sound to maintain a certain amount of working capital, so bills are paid on time. Increasing Investment Effectiveness
Deploying working capital can be a double-edged sword: it ensures liquidity but also ties up capital that could have been better invested elsewhere. Because working capital is the amount of current assets in excess of the amount of current liabilities, it is funded by long-term capital raised for investment purposes rather than operational maneuvers. When investment capital is allocated away for short-term uses, it potentially reduces a company's investment effectiveness.