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: 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. Shortening the Cash Conversion Cycle
Even with a low level of working capital, companies can still have sales on credit if they try to make the collection process as short as possible. The sooner accounts receivable are converted to cash, the less working capital is required. Inventories also potentially tie up funds for long periods. In addition to raw materials, finished products can remain unsold for some time, which further lengthens the cash conversion cycle. If a company wishes to maintain a low level of working capital, sales must be made promptly after production, so funds stay within the cash conversion cycle for as little time as possible.