(a) Explain the meaning of working capital and state its importance. (b) Outline any seven factors which might affect the rate of turnover.

Answer Details

(a) Meaning and importance of working capital

Meaning: Working capital is the excess of current assets over current liabilities. It is the part of a firm's capital used to finance day-to-day trading operations, that is:

\[\text{Working capital} = \text{Current assets} - \text{Current liabilities}\]

Importance:

• It is used to buy stock (goods) for resale and to keep the business trading.
• It enables the firm to pay wages, salaries and running expenses as they fall due.
• It enables the firm to meet its short-term debts (creditors) promptly, maintaining a good credit reputation.
• It allows the firm to take advantage of cash discounts and sudden business opportunities.

(b) Seven factors that affect the rate of turnover

1. Nature of the goods: perishable and everyday goods sell faster and have a high rate of turnover, while durable goods sell slowly.
2. Price of the goods: low-priced goods generally sell faster than expensive ones.
3. Location of the business: a shop sited where there are many customers records a faster turnover.
4. Demand for the goods: goods in high or steady demand move faster off the shelves.
5. Advertising and sales promotion: effective advertising increases sales and speeds up turnover.
6. Amount of credit given: selling on credit and after-sales service can boost the volume and speed of sales.
7. Level of competition and quality of service: good service, variety and competitive pricing attract more customers and raise turnover.

(Other factors include the season of the year and the income level of customers.)