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: 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. As long as liquidity concern is adequately addressed, low working capital is desired to ensure effective use of long-term funds. Improving Operating Efficiency
The amount of working capital required each operating cycle is dependent on a company's operating efficiency. For example, the more a company can make in cash sales or the faster it can turn over inventories, the lower the amount of working capital it needs. When a company maintains a low level of working capital, it can force itself to improve its operating efficiency so operating cash flows, coupled with additional working capital, can safely cover costs and expenses during operations. With too much funding tied up idly in working capital for liquidity backup, a company may become less concerned about operating efficiency.